“The government can put them under surveillance and put pressure on them through their employers or relatives not to create problems,” said Minxin Pei, professor of government at Claremont McKenna College, who writes a study on China’s internal security apparatus.
China has a long way to go on its ability to contain the fallout from an Evergrande collapse. After Xi Jinping, the most powerful Chinese leader for generations, entered his second term in 2017, he identified controlling financial risk as one of the “great battles” for his administration. As a likely third term that begins next year approaches, it could be politically damaging if his government were to mismanage Evergrande.
But China’s problem may be that it controls financial panics too well. Economists inside and outside the country argue that its guarantees have pampered Chinese investors, leaving them too willing to lend money to large companies with poor repayment prospects. Longer term, however, China’s greatest risk may be that it follows in the footsteps of Japan, which has seen years of economic stagnation under the weight of huge debt and slow, unproductive businesses.
By failing to forcefully signal an Evergrande bailout, the Chinese government is essentially trying to force Chinese investors and companies to stop funneling money to risky and heavily indebted companies. Still, there are risks associated with this approach, especially if a messy collapse disrupts the legions of homebuyers in China or anger potential investors in the real estate market.
A sudden default by Evergrande on a wide range of debt “would be a useful catalyst for market discipline, but could also deteriorate the sentiment of domestic and foreign investors,” said Eswar Prasad, professor of economics at Cornell University. and former director of the China Division of the International Monetary Fund.
Some global investors fear that Evergrande’s problems represent a âLehman moment,â a reference to the collapse of investment bank Lehman Brothers in 2008, which heralded the global financial crisis. The collapse of Evergrande, they warn, could expose further debt problems in China and hit foreign investors, who hold massive amounts of debt from Evergrande, and other real estate developers in the country.