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Breakingviews - Evergrande contagion tests Beijing’s generosity

An employee of Suning piles up reusable boxes to be delivered at a logistics center ahead of the Singles Day online shopping festival in Nanjing, Jiangsu province, China October 28, 2017. Picture taken October 28, 2017. REUTERS/Stringer

HONG KONG (Reuters Breakingviews) - Evergrande’s troubles are proving contagious. Suning.com, one of China’s best-known retailers, recently threw a financial lifeline to the embattled property developer. That added to the $10 billion company’s own debt woes. A government bailout looks imminent, but Beijing has reason to hold back.

Suning boss Zhang Jindong and Evergrande founder Hui Ka Yan go back a long way. The long-time business partners have joint ventures spanning real estate and e-commerce. In 2017, Zhang’s electronics-focused chain led a group of strategic investors that provided funding on the condition of an eventual domestic stock market listing. When Beijing scuppered Evergrande’s plans, those investors were entitled to get their money back. Zhang raised eyebrows last September, however, when he decided not to force a repayment of 20 billion yuan ($3 billion) from Evergrande despite Suning’s mounting financial troubles.

That has turned into a costly mistake. The pandemic had pushed the Alibaba-backed company into the red in the nine months to September. Even more alarming, cash-strapped Suning has more than $5 billion of debt coming due within a year’s time. On Thursday, Suning said Zhang and another entity controlled by him planned to sell up to a 25% stake worth $2.5 billion based on the stock’s last trading price.

Details have yet to be disclosed and any deal will require approval from authorities. The provincial government of Jiangsu, where Suning is based, may step in to bail out its corporate champion. The city of Nanjing’s state asset manager and other public infrastructure and transportation outfits will likely become new shareholders, Chinese media Caixin reported.

Justifying a public bailout to policymakers will be challenging. Increasingly, they have opted to stay on the sidelines rather than rescue the country’s overextended companies, including newly bankrupt travel conglomerate HNA. Over the past six months, defaults at state-owned firms have surpassed private ones, according to Capital Economics. Suning’s fate may depend on Beijing’s generosity.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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