Partly inspired by this Noah Smith article.

I was talking with a friend and we were trying to itemize what options might be available to the Chinese government to resolve the collapse of Evergrande.

Smith ids two options; my friend added another:

  1. "Keep lending money at below-market rates, which companies then use to roll over their debts, continue building, and make creditors whole." Tradeoff: this would possibly lead to lower TFP because there would still be investment in weaker sectors of the economy.

  2. "Bailout and wind-down: have the government step in, buy Evergrande’s crappy real estate assets, make creditors (mostly) whole, and then slowly restructure, sell off, or repurpose the assets while winding down or eventually selling off the company." Tradeoff: this might be harder to do if there are slowdowns in other (debt-loaded) parts of the economy, it might put pressure on other industry and you may have an employment level issue if a lot of people in real estate have to switch jobs.

  3. My friend also suggested that the Chinese govt could pay off US-denominated bonds (presumably held by some SOEs in the real estate industry) as a way of restructuring debt in those companies. Tradeoff: presumably this would move the debt to the Chinese government and limit their ability to finance other sectors.

Are these a robust list of options for the CCP? Do I have the above mostly correct?


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