‘A different kind of moral hazard’: The history and politics behind the Evergrande debt crisis

Hello and welcome back to MarketWatch’s Extra Credit column, a weekly look at the news through the lens of debt.This week we’re looking at staffing shortages at the nation’s largest consumer lender, the debt ceiling and the disproportionate impact of traffic fees. But first up, we’re talking corporate debt in China.

Rithmire, who studies the relationship between capital and the state in China and elsewhere in Asia, explained that private enterprises having access to corporate debt is a relatively new phenomenon in China. For much of the country’s modern economic history, companies that weren’t owned by the state struggled to get access to credit from state-owned banks because their legal status was nebulous, she said.

That nexus between government and business makes the moral hazard calculation different for Chinese firms and government officials than in other countries where business and government aren’t quite as close, Rithmire said. For example, critics of bailouts or the lack of prosecution of financial crimes here in the U.S. tend to worry that these kinds of behaviors encourage malfeasance because firms are sure they’ll be bailed out or avoid consequences for their actions.

Last year, the Chinese government did attempt to curb borrowing by debt-laden property developers by instituting rules on the amount of leverage these companies could take on if they wanted to borrow more. The so-called “three red line” policy is part of what precipitated Evergrande’s downfall.

Though many outside of the wonk set may find it hard to care about an audit of an obscure government agency’s workforce needs, there’s reason to care even if you don’t identify as a policy nerd. The GAO’s findings have implications for the millions of people with a federal student loan.

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