Manasi Phadke

Chaoshoubao for Indian voters

Manasi Phadke | Updated on October 06, 2021

Global turmoil China Evergrande Group -- too big to fail?   -  REUTERS

An ‘Evergrande’ inspiration for Indian politicians

It is 20th September 2021. Netaji is eating his fourth samosa nervously watching the Evergrande crisis unfolding on the TV. He starts as Clever Guptaji enters the room.

Netaji: Oho Guptaji, did you see this news? This Chinese company Evergrande is now apparently going bankrupt! My God, will my steel and cement stocks fall? Oh, look at the ticker on BSE – all red. This is really wretched.

Clever Guptaji (wincing): I think we need to be more worried about the GDP falling, Netaji.

Netaji (staring at the ticker with desperation): Eh? Eh? GDP? I don’t see it here! That’s GKP, GD, GE, GR, where’s GDP? Am I exposed to this GDP also?

CG (exasperated): Sir, I am talking of the Gross Domestic Product — the GDP of India, Sir. Let us hope that the crisis gets contained and does not spill over into a real sector issue.

Netaji (relieved): Arre Guptaji, you are always high and mighty on all these country matters. Am I not a part of the country? You first help me to maintain my income, that is your contribution to the GDP. These Chinese are going to kill off all my hard-earned money. Don’t look at me like that — arranging thousands of hooligans to go, that too unmasked, in long, long morchas and rallies is hard work. Yessir!

CG (rolling his eyes): Now, calm down, Netaji. Nothing is going to happen on the stock markets. The analysts are saying that Evergrande is not TBTF.

Netaji (interested): You are the cool one, Guptaji! You really know all this slang stuff! What is this TBTF?

CG (exasperated beyond belief now): Sir, don’t you read anything? Ok, don’t answer that — I know the answer. I mean (ingratiatingly, as Netaji turns wrathful eyes on him), I know you don’t have much time to read, given your, errrr, busy schedule with the morchas and the rallies. Well, TBTF means Too Big To Fail. When an entity becomes too big, its collapse can trigger the collapse of several other organisations with it. In such a situation, governments try to prevent the collapse of the TBTF entity, thereby preventing a larger crisis from happening. In the present context, Evergrande has taken a lot of loans — $300 billion, Netaji! — from banks, not only in China but also elsewhere in the world. Now, the company is on the brink of a default. If this company goes under, it will also mean a lot of pressure for many banks. So, the stability of the entire global financial system could be shaken.

Netaji (with understanding dawning in his eyes): Oh, is that why all markets are down. And financial stocks are in the red. And, what is this new contagious disease, Guptaji? All these analysts keep on talking about it — will pharma stocks go up?

CG (totally frustrated): Sir, they are talking about ‘contagion’! If Evergrande defaults, it won’t pay off banks in the US and Europe and Australia, thereby triggering panic episodes elsewhere too. I think the Chinese Government will have to create some kind of a support soon. Evergrande is a construction company. It had bought material from its suppliers on credit. Now, if Evergrande goes under, it will default on its loans and the suppliers will default on their loans as well. It is a double whammy for banks — actually, make that a triple whammy! The employees will also default on their loans!

Netaji (confused): Employees won’t get their payments from the company, Guptaji. So they are protesting on the streets — just see the videos coming in from China! But you are saying that they will default on their loans? Why?

CG: Sir, when Evergrande was on the brink of default two years ago, they came out with a new financial product for their employees. It was called ‘Chaushoubau’. They took loans from their employees by promising them 25 per cent per annum.

Netaji (stars in his eyes): Wow, that is teen saal mein paise double yojana!

CG: Exactly. Many employees actually took loans at lower rates from their banks and put their money into the company. Last year, when the company had to return the funds, they asked for a 1-year extension. And now, looks like it will be a multi-year extension.

Netaji (dreamily): Guptaji, this chaushoubau sounds very interesting. I am thinking we will also come out with a pol-fin product for our voters. We will offer 50 per cent and full money back in three years!

CG (scared): But Sir, where are you going to invest that money? How will you return it?

Netaji (smiling): Arre Guptaji, didn’t you just tell me that chaushoubau doesn’t have to be returned? Chill, Guptaji, we are also TBTF. And, after all, YOLO!

The author is a brave economist trying to laugh against the odds.

Published on October 06, 2021

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