Xi plots prudent response to Evergrande crisis

The China Evergrande Group plot is thickening on two fronts at arguably the worst possible moment for Xi Jinping’s economy.

One is the suspension on Monday of shares in Evergrande and its property management unit as questions emerge about the wherewithal of the most indebted developer to meet fresh debt-payment tests. The second involves mounting questions about whether a smaller developer, Fantasia Group Holding, can meet a US$210 million bond maturity.

Though a bit player compared to Evergrande, Fantasia’s failure to make interest payments last month underscores broader  and intensifying  risks to global credit markets already on edge.

On September 29, S&P Global slashed Fantasia’s rating to “CCC,” a decidedly speculative grade, from “B” in one move. The problem is that when S&P warns of substantial risks that Fantasia might fail to repay obligations over the next six months, it could be talking about a whole range of big companies in China’s most important domestic industry.

The good news is that China Inc. is actively working to ring-fence the problem, starting with Evergrande.

A restrained response

So far, President Xi’s government has resisted the urge to announce a formal bailout to avert risks of a broader contagion. Though the central bank injected about $123 billion of liquidity into the system these last 10 days, Xi’s regulators have not stepped in to save the excesses of Evergrande founder Hui Ka Yan.

Instead, Beijing is nudging China’s biggest banks to support the property sector, loosen credit conditions for homeowners and in certain cases buy out some of Evergrande stakes in financial institutions to restore calm in credit markets.

It’s not clear if the strategy will cheer global investors, but so far China is indeed avoiding a 2008-like meltdown that slams world markets.