Evergrande crisis will tighten China’s non-performing debt market

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Evergrande crisis will tighten China's non-performing debt market
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Xi deserves credit for fighting shadow banking and convincing that Beijing will not guarantee crazy investments.

Evergrande’s woes could be a good deal for China’s distressed debt investors, thanks to the improved valuation of distressed assets. Xi Jinping is an unmitigated communist, but he leaves room for market forces when they help him.

Official delinquency statistics have been unreliable for years: delinquent loans were routinely masked and junk debt was hidden off balance sheets. But Xi deserves credit for giving reformist Guo Shuqing, the head of banking watchdog, a license to crack down on shadow banking and convincing the market that Beijing will not guarantee crazy investments. Local banks got rid of a whopping $ 470 billion of troubled loans in 2020 alone, and there may be more this year. It’s nearly a third of bad debt outstanding in 2019, according to PwC. The success appears to have encouraged Xi to forcibly deleverage real estate, which contributes a quarter of GDP.

Before, the authorities intervened with force when state entities had problems or when private entities put political or financial stability at risk. Huarong AM was the first, and Evergrande the second. But the intervention is gentler every time. You no longer need to micromanage resolutions; there is an enhanced network of courts, local auction houses, and even online exchanges reselling collateral or loan portfolios, managed by Alibaba or JD.com. The system is more transparent, judges know more and decisions go faster.

ShoreVest’s Ben Fanger, which invests in distressed debt, says Chinese asset pricing – long distorted by speculators – has improved dramatically. It is a side effect of the suppression of shadow banking, and shows a change of course.

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The waves of the Evergrande collapse have a long way to go, and many distortions remain in a market with so many state-backed players. But private equity can play a more important and profitable role than before.