Managing a Grey Rhino

Beijing finally stepped in to save Evergrande from immediate default on $300 billion. It did this by removing a regulatory hurdle that has prevented it from renegotiating its debt. However, this doesn't necessarily mean that Beijing blinked, as suggested in this Zerohedge article. It may just as well be a tactical move designed to incur maximum damage on adversaries while ensuring minimum blowback from foreign states.

If Beijing sees Evergrande as a financial weapon, as I believe they do, then it must be carefully managed so that Beijing can claim to be without blame when the ultimate default happens. The default must be linked to factors entirely outside Beijing's control. It mustn't default due to some regulatory hurdle. Rather, it must default due to the normal operations of a free market. In such a case, Beijing's only blame will be in the past, when it allowed Evergrande to load up on more debt than it could handle, and that is too long ago for foreign states to blame Beijing for any knock on effects of Evergrande's eventual default.

This is the sort of maneuvering that Sun Tzu recommends in his Art of War. It draws heavily on the philosophy of Tao that teaches us to take advantage of the forces available to us in the universe. Instead of pushing directly for a desired outcome, we're told to direct the forces of the universe in such a way that this outcome becomes inevitable without us ever pushing very hard for it to happen.

Beijing has not stepped in with direct financial help. It has removed a regulatory hurdle. The Tao is being managed. The default is still going to happen. But it will happen later, and this may cause some westerners and other adversaries of China to step in with more exposure to Evergrande based on a mistaken belief that Beijing has decided to save it from default.

There's no telling what Beijing's actions will be in the future. But it has yet to blink. China's grey rhino is still on the loose. Disaster has not been averted. It has been delayed.

The Tao is in charge of Evergrande's fate. That means that we may see a sudden devastating default, or a series of smaller defaults. There may be endless negotiations and re-negotiations on debt. But as long as Beijing keeps its hands off, the financial fallout will be felt globally, and that is likely to be precisely what Beijing wants. They wants to see devastation without blowback, and their latest move looks like a strep in that direction.

Xi Jinping

By Palácio do Planalto - https://www.flickr.com/photos/palaciodoplanalto/47945730807/, CC BY 2.0, Link