The Evergrande story: Funding the well-connected

Nothing is ever too big to fail. The collapse of the Lehman Brothers in 2008 showed the world this hard, inevitable truth, as it spread dizzying shock waves through financial markets across the globe.

Years later, we’re hearing about another financially troubled giant, Chinese real estate developer Evergrande, dubbed by some as China’s Lehman moment.

Hong Kong-listed Evergrande, founded by a businessman once crowned as Asia’s richest man, Hui Ka Yan, known also as Xu Jiayin, is reeling under more than $300 billion in total liabilities.

In December last year, Fitch Ratings said the Chinese builder had defaulted on its debt, downgrading the company to “restricted default” because of Evergrande’s inability to pay interest due that month on two dollar-denominated bonds.

Many have expressed concerns on the implications of an Evergrande collapse. It could trigger wider risks for China’s property market, hurting homeowners, the broader financial system, and yes, even the global markets, analysts said.

Impact on the Philippines

According to Bangko Sentral ng Pilipinas Governor Benjamin Diokno, Evergrande’s default would have no direct impact on Philippine banks and the financial system.

“Philippine banks are largely domestic-oriented, with cross border exposures or claims from counter parties in other countries at 9.4 percent of total banking system assets,” Diokno said last year, noting that exposure to China alone is minimal at 0.86 percent of the total banking system assets.

That’s reassuring, especially for Filipinos whose hard-earned money is kept in banks.

Lessons

There are lessons, however, we can learn from the Evergrande story.

One is that rapid expansion with mounting debts could be disastrous in the end, no matter how big your company has become.

Evergrande found itself in that situation because it is exactly what its chairman, a tycoon well-connected to the powers-that-be, did to grow his empire.

Xu Jiayin is a member of the Chinese People’s Political Consultative Conference, an elite advisory group in the People’s Republic of China and a central part of the Chinese Communist Party’s United Front System.

Because he is well connected, creditors funded his rapid expansion.

“Mr. Xu’s connections likely gave creditors more confidence to keep lending money to Evergrande as it grew and expanded into new businesses. Eventually, though, Evergrande ended up with more debt than it could pay off,” the New York Times reported.

Doesn’t this sound familiar? How many local versions of Xu Jiayin have we had, perhaps in every administration since the time of the late dictator Ferdinand Marcos?

‘Favored Friends’

In a 1983 article in the Wall Street Journal titled “Favored Friends: In Philippines, it helps businessmen to know Marcos,” reporter Paul Gigot wrote about how Marcos cronies benefited from their close ties with the then president.

Writing about the late banker and sugar baron Roberto Benedicto, Gigot said that when the Philippine Central Bank slapped big financial penalties on Benedicto’s Republic Planters Bank for failing to meet its reserve requirements, Marcos issued “Presidential Letter of Instruction 1330, wiping out the penalties owed by the bank.”

In the article, Benedicto’s camp said the presidential action had nothing to do with his ties with Marcos.

But a government source quoted by Gigot disagrees. “It’s favoritism. It’s demoralizing. And it isn’t the way to run a central bank.”

Decades later, Benedicto entered into a compromise deal with the government and surrendered billions of assets. The Sandiganbayan later removed him from the P102 billion ill-gotten wealth case against the Marcoses.

But this isn’t just about Marcos and his cronies. It’s happened in nearly every administration – businessmen getting extraordinary favors from presidents at the risk of inflicting harm or damage on our financial system, our economy, and the people’s money.

The Duterte administration is no exception.  For months, we listened to the Pharmally hearings conducted by the Senate and we saw how glaring the connections are to some people in power.

We’ve also been hearing about quite a few businessmen’s rapid expansion, funded by piles of debt and how some laws and regulations have been tweaked to benefit a privileged few.

This is what we need to watch out for, because a single default of a Philippine conglomerate or a troubled company would have far-reaching implications on our economy.

What Evergrande really tells us is that funding the well-connected, the cronies, the wheeler-dealers, will one day catch up on the lenders, on the economy, and on the business empires themselves.

As the story of Xu Jiayin tells us – from becoming Asia’s richest, to reaching internet stardom for wearing the priciest Hermes gold belt, to seeing his empire in a giant financial mess – it’s only a matter of time.

Iris Gonzales’ email address is [email protected]. Follow her on Twitter @eyesgonzales. Column archives at eyesgonzales.com