Regarding Evergrande, if someone says “Lehman moment,” stop
listening (unless there’s a “not a” preceding it). If they say “contagion” and
tell American finance stories, stop listening. If they say “counter-party risk,”
stop listening. The concepts don’t apply, because the Chinese financial system
is largely not commercial. It’s largely a government arm. Government
interference in finance is increasing, which is the true risk, though not for
the short-term.

Evergrande’s widely reported $300 billion debt is equivalent to half a percent of China’s reported banking assets. This is not definitive — in a commercial system, uncertainty over who ultimately holds that debt could freeze parts of the credit market. But in the People’s Republic, it doesn’t matter who ultimately holds the debt. If the government says lend, you lend.

If the government says bail out parts of Evergrande, accept
the losses. If your Evergrande-linked investment plunged in value, protest for
a couple of days then go home. Or else. State-owned financials are not
commercial institutions. They don’t maximize profit or shareholder value, they
obey orders. Chinese non-state financials are seized at will by the government
and behave accordingly.

No internal contagion; what about external? The pool of international assets is of course huge, on the order of 2000 times Evergrande’s debt. International contagion requires concentration of Evergrande risk in a single financial institution which is also tightly connected to others. This concentration flies in the face of the many months of warning investors have had. And, for what it’s worth, no one has disclosed such a vulnerability.

Evergrande hurts an already busting property sector and indirectly slows economic growth. But it’s not a top two finance story. Arguably the top is relatively good news on overall debt: New Bank of International Settlements’ data show China’s outstanding credit as a share of GDP falling in the first quarter. While that’s partly due to artificially fast GDP out of the pandemic, Beijing is also limiting lending and direct government borrowing this year.

If sustained, this would be far more important than Evergrande.
Demography is the lead risk to Chinese growth, but its pace is glacial. The
PRC’s outstanding credit burden doubled to 290 percent from the third quarter
of 2007 to the third quarter of 2020, the fastest increase on record. Japan
never contained its borrowing, and the US is failing to do so now. Among many
things, a financially responsible China draws capital and can challenge dollar
supremacy.

It’s obviously far too soon to draw that conclusion. It may
not be too soon to draw a very different conclusion from the other contender
for top financial story: China is headed backward in terms of transparency.
Stable Chinese debt would enhance the attractiveness of the yuan. Less public information about the yuan would do the
opposite and seems to be the short-term goal, at least, of regulators.

Their discouraging discussion of the yuan joins discouraging financial blogging and discouraging publication of commodities prices. These add up to the next bump being more dangerous than Evergrande, because we won’t understand it as well and we may not even see it coming.

There’s also an implication for another headline event: China applying to join the accord formerly known as TPP (the Comprehensive and Progressive Agreement for Trans-Pacific Partnership). Applying to a supposedly liberalizing trade pact while reducing transparency is . . . unsubtle. For their own credibility, existing TPP members should quickly decline. Chinese policy is regressing, and that’s far more important than Evergrande.

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