Evergrande Crisis to Be Dealt With by Market, PBOC’s Yi Says

China Evergrande Group’s inability to meet its obligations is a market event and will be dealt with in a market-oriented way, the head of the nation’s central bank said.

“The rights and interests of creditors and shareholders will be fully respected in accordance to their legal seniority,” People’s Bank of China Governor Yi Gang said Thursday in a pre-recorded video message to a top-level seminar about Hong Kong’s future as an international financial center.

The comments provide the latest signal that Beijing won’t bail out Evergrande as it strains under more than $300 billion in liabilities. The embattled property developer, which has yet to pay overdue interest on two bonds this week, said on Friday it will “actively engage” with offshore creditors on a restructuring plan. The company is planning to include all its offshore public bonds and private debt obligations in the restructuring, people familiar with the matter said Monday.

Hong Kong has established an effective system and well defined legal provisions to deal with such issues, Yi said. Risks from a few firms in the short term will not undermine Hong Kong’s financial system in the long term, he said.

Beijing’s reluctance to bail out the developer sends a clear signal that the Communist Party won’t tolerate massive debt build-ups that threaten financial stability. The PBOC reiterated on Friday that risks posed to the economy by Evergrande’s debt crisis can be contained, citing the developer’s “own poor management” and “reckless expansion” for the problems it faces.

Evergrande’s dollar bonds are close to record lows

Authorities have acted to limit the fallout from Evergrande’s crisis. The PBOC said on Monday it would lower the amount of cash banks need to hold in reserve. The same day a meeting of the Politburo signaled looser curbs on real estate. That’s helped stabilize the nation’s financial markets, with the CSI 300 Index of stocks heading for its best three-day gain since May. Chinese junk dollar bonds have also risen for three straight days.

The grace period for $82.5 million worth of coupon payments expired on Monday and there has been no indication bondholders have received funds since. Evergrande hasn’t released a public statement on the payments. –BLOOMBERG