China Evergrande defaults on debt By CBS News

There could be global economic Fallout after one of China’s largest real estate developers defaulted on its debts. A major credit rating firm says evergrande, defaulted on major Bond debts. And now the question is, what will Beijing do for more on this. I want to bring in Isaac stonefish. He is a CBS News contributor and the founder of strategy, strategy, risks of firm that helps companies manage political and other risks when dealing with China.

I find this fascinating. So there’s been a lot of talk about evergrande sort of leading up to this moment. Will their award. They we knew they were in trouble but I think you need to start with the basics. What is ever Grande? How did they–how did the company end up in this position where they were sort of over-leveraged and to the point where they cannot pay their debts.

Programs one of China’s largest property developers, they employed tens of thousands of people. They had property in basically, every major city in China and a lot of the minor ones. There’s a lot of minor cities in China. I think it’s something like it property around 280 cities across the country, and they just got too big too quickly. That was very, very cheap in China, ever Grande, got very over-leveraged another in a situation where they just can’t pay what they owe.

And so, where it’s fascinating to watch how exactly Beijing is both going to signal to the economy and to other companies, don’t do whatever Grand did while at the same time, saying, the spigots are still on. You can still invest. We’re not going to crack down too hard. So it’s a fun balancing act and a pretty complicated 12.

So in reading about evergrande, you know, the question comes up in my head is evergrande too-big-to-fail will the Chinese government step in? And then we hear that the governor of the People’s Bank of China said that Beijing has no plans to bail out evergrande. And then he later added that the short term risks of real estate companies won’t affect the market long term, which is something that you were sort of suggesting. Hey, we’re still open for business. To don’t pay attention to this catastrophe over here. What is China doing to quell fears?

The only thing in China and it’s too big to fail, is the Chinese Communist party. Everything else. The party is very comfortable, letting go as needed. So I think they are, you know, sending in this way is a pretty affirming mixed message, which is that, you know, evergrande will fall gently and Chinese investors as much as possible. Especially mom-and-pop folks, who actually bought apartments and are, you know, I’m sort of left wondering what the happened will be protected.

And at the same time, this is, you know, this is it forever Grand, but other companies will have room to grow. It’s sort of a, how do you say it? It’s a lot of different notes played at the same time in a not too discordant fashion.

Beijing sort of had their finger on this issue for a while. They’ve been attending sort of real and developers by forcing them to shrink their debts. Some smaller developers have gone belly-up because of this, they miss payments. So I guess the question is now that one of China’s largest real estate companies is caught up in this could we see that policy of pulling back change a little

You can cut it. So right now, roughly 30 percent of China’s economy is controlled by what are known as state-owned Enterprises, which are arms of the Communist party and Beijing wants them to be more dominant in the economy. So I think we’re still going to see more pain for companies that are private or nominally private or mostly privately owned. So that she’s young paying Chinese chairman can feel like there’s more room for the state to control.

Economy.

So then the other concern is, could there be a domino effect? I’ve listened to analyst sort of on both sides, some analysts say. Yeah. Evergrande is big but it’s not that big that there will be sort of a spillover effect in the rest of the world and others say oh no, this is the first Domino to fall and you know, by the way, there’s a lot rotten in the Chinese economy. So, you know, prepare for the worst. How will we to assess what’s happening with evergrande? So

Famous last words. I really don’t think this is going to be the the domino effect that when trying to catch is a cold, the u.s. Southeast Asia, you know, sneezes. I’m not that this is going to be what’s happened. But frankly, these are so, so difficult things to watch and predict and you. And I could chat six months from now and we could be at the precipice of a economic crisis, prompted by evergrande. So I’m going to vote, no, but

We will see.

I’m curious is Beijing. Go looking into, not just these development firms. But the banking small banks. Are they sort of taking a hard look at the financial institutions, in that country to ensure that they can sort of stand the test of time and they’re healthy. Aging’s priority is the sort of the what they would term or described as the political loyalty of these firms as opposed to the economic health of these terms. So they are investigating.

Them. But it’s much more. Are they going to advance? What Beijing? And she Chinese chairman thinks of as China’s priorities. That’s to them more important than will. They default are they solvents? Are they adding value to the economy? So they are investigating. But if I were a private firm in China, I’d be a lot more worried about what Beijing thought of my political loyalty. Then what they thought about my bow shoots.

Wow, Isaac stonefish. Thank you very much.