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Interview

China has means to address Evergrande default: IMF official

Beijing equipped with tools to prevent financial crisis, says Tobias Adrian

Chinese authorities have the means to address a crisis from China Evergrande Group, says Tobias Adrian of the International Monetary Fund.   © Reuters

WASHINGTON -- While China Evergrande Group missed payments on bond interests for the third time in as many weeks, the International Monetary Fund said in a report Tuesday that the exposure of Chinese banks to the real estate conglomerate appears limited and that the government has the ability to contain the fallout.

With $300 billion in liabilities hanging over its head, Evergrande has until the end of next week to make good on a set of missed coupon payments before a grace period expires and it officially goes into default.

Tobias Adrian, director of the IMF's monetary and capital markets department, told Nikkei that China is better positioned to address a potential financial crisis than the U.S. had been leading into Lehman Brothers' failure.

The interview with Adrian below has been edited for length and clarity.

Q: The market is concerned about the default of China's debt-ridden real estate developers like Evergrande. How do you assess the impact on the global financial market and the macroeconomy?

A: Our view is that the authorities in China do have the means to address Evergrande. They had the fiscal capacity and they have the institutional setup to do whatever it takes to save it.

But, of course, there are some risks, and let me name three risks. One is that macro activity is slowing down more than expected. The properties sector is hit harder than expected -- you will see more than just one or two developers fail. It could be a broader phenomenon.

Secondly, there could be more contagion. There could be confidence effects. For the moment, we have not seen the contagion, so the offshore markets are pricing in some distress.

The IMF's Tobias Adrian noted the importance of Chinese authorities communicating clearly and having a clear plan.

But when you look at the domestic Chinese markets, there is really no spillover to the proper bond market more broadly. But, of course, we all know that some of the paper of Evergrande is held in wealth management products and there is exposure of a number of financial institutions to Evergrande. So there could be, in principle, a spillover effect in that sense.

And then finally, asset valuations globally are stretched, so there's a variety of shocks that could trigger a selloff, and it could be any negative shock.

But again, we do think that fundamentally the Chinese authorities do have the means to address the crisis. But it's very important to communicate clearly and to have a clear plan.

I think whenever they communicated, markets calmed down. But being very clear about what the process is, there is some scope.

Q: Is Evergrande different from the global financial crisis triggered by Lehman Brothers' failure?

A: There were vulnerabilities in other parts of the financial sector. And then, of course, banks were very weak due to the sovereign crisis, so the dealers were weak. There were weaknesses in many different pockets and it took some time to come up with the right tools to address the crisis.

I think here what is different is that China can do things that the U.S. was not able to do immediately, because it has a very different legal and institutional framework. Secondly, while we think that vulnerabilities are high in China in the corporate sector, the banks are well capitalized.

There are many other tools as well. They have fiscal space and they could support the economy in other ways to offset the slowdown in the property sector. So, in that sense, I think China is in a fairly good place.

But all these policies have to be coordinated, and there are many regional differences. Some provinces are very strong. Others are weaker. Some could slow down more than others.

So, the challenges of getting it exactly right are very large, and so while, overall, we do think that they have the tools, still there's ample scope for things -- for uncertainty and for confidence shocks.

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