• Adam Harper

China, Evergrande and the art of strategic ambiguity

With Evergrande, China has said it best by saying nothing at all. That can be a good tactic when you hold all the cards, but risky when you're in a less powerful position.

Ronan Keating was right: sometimes, what you don’t say carries the most meaning. That’s because, if you are powerful enough, you can rely on legions of other people filling in the gaps in your statements and making educated guesses about what they really mean.

Out of necessity, central banks have a particular talent for coded language. But the Federal Reserve and its ilk use a well-established system of signals that is intended to guide the market as to its intentions without being too restrictive.

In their few reported comments about Evergrande, Chinese authorities have certainly left open plenty of room for manoeuvre. Bloomberg reported that financial regulators in Beijing had told the company that it should “take all measures possible to avoid a near-term default on dollar bonds while focusing on completing unfinished properties and repaying individual investors.”

What the regulators didn’t say was how cash-strapped Evergrande should avoid that default, complete unfinished properties and repay individual investors all at the same time. Most importantly of all, there was no guidance on whether the government would provide any support.

Reading the runes

And so the interpretation begins. Did it sound like China doesn’t want a default? Yes. Does that mean the authorities will step in? Maybe. Do we know how or when? No.

At the same time, the Wall Street Journal reported that “Chinese authorities are asking local governments to prepare for the potential downfall of China Evergrande Group” and that local authorities and state-owned enterprises have been told to “step in to handle the aftermath only at the last minute should Evergrande fail to manage its affairs in an orderly fashion.”

Does that mean China would prefer to avoid bailing out Evergrande? Of course: what government wants to bail-out companies if it can be avoided, especially when they have $300 billion of liabilities? Does that mean authorities will let market forces take their course? Maybe. Or maybe not.

You could be forgiven for not being sure what to make of all this. But investors appear to have looked into this cloud of ambiguity and taken comfort.

You could be forgiven for not being sure what to make of all this. But investors appear to have looked into this cloud of ambiguity and taken comfort.

The mounting sense of panic and contagion that led to speculation about China’s ‘Lehman moment’ earlier in the week has eased. Bonds and shares have stabilised globally and in China, perhaps helped by a slightly ambiguous announcement about Evergrande settling an onshore bond coupon payment and the People’s Bank of China adding liquidity to the system.

Risky business

So China’s application of strategic ambiguity seems to have worked for now. Markets are calmer and the authorities have retained complete flexibility to act as they see fit – they haven’t made any official statements, let alone committed to anything.

For companies who might feel inspired to emulate this approach, though, a word of warning. Letting other people weave hints and clues into a story about what is going to happen next can work if you hold the power to decide the future, as China does with Evergrande. If you don’t, outsourcing narratives that are critically important to you can be a risky business. Saying nothing at all can work for governments and central banks. For the rest of the world, you probably say it better when you do say something.

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