There are two types of scary borrowers in China. The first kind has good-looking assets but it isn’t quite clear how much debt they have hidden away. That’s at the heart of the China Evergrande Group crisis. The second has a lot of debt but no assets to shore up their ability to repay — but they have the political connections some hope will help bail out the first kind.
To avoid hurting the broader economy, China is considering easing rules to let its distressed real estate developers sell off assets to avoid defaults. The so-called “three red lines” on leverage ratios — formulated in August 2020 — were so tight that there were no buyers for developers’ property holdings even if the likes of Evergrande were willing to offload projects at fire sale prices.
