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Look to Japan for lessons on Evergrande - The Australian Financial Review

Look to Japan for lessons on Evergrande - The Australian Financial Review

Look to Japan for lessons on Evergrande - The Australian Financial Review
Sep 26, 2021 1 min, 36 secs

The Evergrande crisis is less ‘Lehman moment’ and more domestic property and bank asset bubble, like the one which dogged the Japanese economy for decades?

That is a question being raised by investors as China’s second-largest property group struggles under the weight of more than $US300 billion ($413 billion) of debt (including $US20 billion in dollar-denominated bonds) and a cooling domestic property market.

But what links them is a question that stalked Japan in 1997 and now hangs over Chinese finance: namely, what is the pillar of faith on which asset values rest?

There was never enough accounting transparency or true corporate independence for investors to determine whether a bank (or real estate company) was worth what its corporate accounts suggested.

While asset values have been propped up by that pillar of government support, it now seems that the PBoC wishes to reduce debt and sky-high property prices. Bloomberg.

Thus, when a real estate bubble burst in the early 1990s, fostering widespread suspicion that the system was laden with bad loans, investors did not initially panic — or not while there was faith in the pillar of government to support asset prices.

And since corporate accounts did not offer an alternative pillar of faith, confidence evaporated.

And while asset values have been propped up by that pillar of government support, it now seems that the PBoC wishes to reduce debt and sky-high property prices with “three red lines” of new regulatory caps — and make an example of Evergrande.

Perhaps the PBoC will step in to restore that governmental pillar of faith.

However, even if a nasty crunch is avoided in the short term — and that remains a big “if” — the longer-term question is this: does the PBoC really want to take away the government pillar of faith underpinning markets.

And, as the Hokkaido Takushoku affair shows, when trust in the pillar of government support is shattered, it takes a long time to restore or replace.

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