Beyond Evergrande

Evergrande might be insolvent, but its liabilities look digestible for the many mouths of the Chinese state. Clamping down on the leverage that fuelled Evergrande’s rise and ultimate demise, has more significant implications though. It removes a key pillar of economic activity and more importantly weakens the primary lever (credit) that the government has used to fine-tune the economy, manage shocks and meet its all-important growth targets. It is also a case of bad timing. Common Prosperity, even if it works, has high transition costs — not least the redistribution of profits to the beneficiaries. Furthermore, the export boom that has been compensating for domestic pressures is vulnerable as he services recovery continues to evolve. This pressure should translate into further weakness in Chinese equities. We would also be short renminbi versus the US dollar.

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