Guy Debelle of the Reserve Bank of Australia expects China to let Evergrande fail to learn debt lesson

One of Australia’s most powerful bankers is convinced the Chinese government will allow Evergrande to teach other property developers a lesson about unsustainable debt.

Evergrande owes more than $400 billion to investors and has struggled this week to meet annual interest payments of $110 million.

The collapse of China’s second-largest property developer would have huge implications for Australia, as China is a major buyer of Australian iron ore used to make steel.

Reserve Bank of Australia deputy governor Guy Debelle said the collapse of Evergrande, founded in 1996, was a real possibility, with the Chinese Communist Party government less willing to bail it out.

“My assessment is how this will evolve, that is largely in the hands of the Chinese authorities,” he told the Economic Committee of the House of Representatives.

“It’s something we spend quite a bit of time looking at.

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One of Australia's most powerful bankers is convinced the Chinese government won't let Evergrande teach other developers a lesson about unsustainable debt (pictured is the Evergrande Center in Shanghai)

One of Australia’s most powerful bankers is convinced the Chinese government won’t let Evergrande teach other developers a lesson about unsustainable debt (pictured is the Evergrande Center in Shanghai)

“Their tolerance for default is higher than it was a few years ago.

“They’re willing to see some kind of default with limited consequences in a way they probably wouldn’t go back in a few years.”

dr. Debelle said China wanted to teach the real estate sector a lesson about the risks of over-borrowing.

“Your back isn’t always covered,” he said.

‘You can have a controlled standard that can be a beneficial lesson for everyone that you may need to estimate the risk a little better.

That’s where they’ve shifted rather than ‘we don’t want anyone to lose money under any circumstances’. There has been a shift in that mentality.’

Credit rating agency S&P Global’s prediction that China will fail had led to a major sell-off on Tuesday night as investors worried about the plethora of unfinished apartments.

Evergrande subsidiary Hengda Real Estate Group on Wednesday agreed to an interest payment agreement with bondholders, but this did not completely prevent a collapse.

Reserve Bank of Australia deputy governor Guy Debelle said the collapse of Evergrande, founded in 1996, was a real possibility, with the Chinese Communist Party government less willing to bail it out.

Reserve Bank of Australia deputy governor Guy Debelle said the collapse of Evergrande, founded in 1996, was a real possibility, with the Chinese Communist Party government less willing to bail it out.

Reserve Bank of Australia deputy governor Guy Debelle said the collapse of Evergrande, founded in 1996, was a real possibility, with the Chinese Communist Party government less willing to bail it out.

The news saw Bitcoin surge 4.8 percent to climb above $60,000 for the first time since Monday, when Evergrande missed bond payment deadlines.

Iron ore prices are back above $100 after falling below that benchmark for the first time since July 2020 on Sunday, but they are still halfway down the $200 level of July 2021.

Evergrande shares rose 32 percent in Asian trading on Thursday after chairman Hui Ka Yan promised asset investors that the property developer would resume construction activities as a Thursday deadline loomed for bond coupon payments.

Shares are down 85 percent in 2021, but Thursday marked the largest one-day rise since the IPO in 2009, a Reuters analysis found.

The Chinese Communist Party government is reluctant to rescue Evergrande at this stage as it cracks down on borrowing too much under a new “three red lines” policy.

President Xi Jinping is also embarking on a pursuit of “common prosperity” forcing billionaires to return me to the state.

dr.  Debelle said China wanted to teach the real estate industry a lesson about the risks of borrowing too much (pictured is the Evergrande Center building in Shanghai)

dr.  Debelle said China wanted to teach the real estate industry a lesson about the risks of borrowing too much (pictured is the Evergrande Center building in Shanghai)

dr. Debelle said China wanted to teach the real estate industry a lesson about the risks of borrowing too much (pictured is the Evergrande Center building in Shanghai)

Liberal MP Tim Wilson, chairman of the Economic Commission, said the potential collapse of Evergrande raised problems for China’s banking system and described the debt problems as “seismic.”

“That could raise bigger questions about the credibility of Chinese banks,” he said.

In August 2020, China introduced a three red line policy to tackle the massive debt burden in the real estate sector, which came into effect this year.

This gave the Chinese government the power to put limits on their debt growth if developers had a high liability-to-asset ratio.

dr. Debelle compared Evergrande’s existence to China’s ability to manage a crisis involving state-owned companies.

“If you look at how countries have dealt with these financial problems in the past, you often see a misstep that can have serious consequences,” he said.

“Whether that will happen this time, I don’t know, but it’s a possibility.

Liberal MP Tim Wilson, chairman of the Economic Commission, said the Evergrande affair raised questions about China's banking system

Liberal MP Tim Wilson, chairman of the Economic Commission, said the Evergrande affair raised questions about China's banking system

Liberal MP Tim Wilson, chairman of the Economic Commission, said the Evergrande affair raised questions about China’s banking system

“The point I’m making is that if you have a lot of balls in the air, sometimes you drop one.

“People in China are watching this very full-time.”

In times of volatility in financial markets, gold has traditionally been viewed as a safe haven, like government bonds and reference currencies such as the US dollar and the Japanese yen.

But Gemini Trust Asia-Pacific managing director Jeremy Ng, who is based in Singapore, said Australians concerned about inflation and a slow economic recovery were increasingly turning to cryptocurrencies.

“Gold has historically been considered a safe haven,” he said.

“However, Bitcoin and several other cryptocurrencies have experienced rapid growth and offer unique, innovative features that make them stand out.”

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