By Andrew Galbraith

SHANGHAI, (Reuters) – If the developments this week at China’s largest property developer show anything, Beijing might soften its efforts to rid it of debt and allow for more economic stability in 2022.

China Evergrande Group’s rocky financial position has been a source of concern for Chinese property companies and the global financial market over the last year. Investors agreed to prolong a payment date on a Yuan bond.

According to a source, the extension proposal was implicitly approved by regulators. It offered investors an insight into what other property companies might do to pay their debts.

As it seeks to achieve common prosperity and better-quality growth, the sector was at forefront of Beijing’s attacks on overpriced industries and high levels of debt.

However, no one knows how far the Communist Party will go to make real estate a more valuable asset to the economy or to dispel investor fears about state bailouts.

Analysts believe regulators favor market-based solutions to debt. They are trying to boost investor confidence, soften economic impacts and increase stability at a time when there is renewed emphasis on stability. It’s a delicate balance.

“The concern seems to be primarily focused on homebuyers, secondarily on workers and contractor counterparties,” said Charles Chang, senior director and China Country Lead at S&P Global (NYSE:) Ratings. “… The government is showing that it wishes the market would function.

Market discipline will remain a key theme. But it will not be limited to the real estate industry. It will also apply to other industries. This seems pretty much the government’s position.

These are crucial times in a year when President Xi Jinping will be expected to win an unprecedented third term of five years as president at this fall’s 20th Party Congress.

JPMorgan analysts (NYSE:) recently identified the largest threat to economic stability as the slowdown in the property markets. Noting that investment growth could be affected by a slowdown of five percentage points, they also suggested that as high as 0.7 percentage points.

Reuters polled analysts this week and found that they expect China to experience a slowdown in economic growth of 5.2%.

GROWTH IN WINNING

Evergrande’s Hengda Real Estate Group reached a deal to hold its 4.5 billion-yuan bonds ($707.60m) with the holders. This agreement allowed Evergrande to avoid technical defaults that could have hindered its restructuring.

After missing payments, the company is struggling to repay over $300 billion of its liabilities. This includes almost $20 billion worth offshore bonds that have been deemed in default by ratings agencies.

According to Refinitiv, Chinese developers face $116 billion of maturing debt in this year.

Graphic: Evergrande contagion, https://fingfx.thomsonreuters.com/gfx/mkt/xmvjonjgbpr/Pasted%20image%201639112002384.png Growing stress in the property sector has prompted Beijing to soften its clampdown at the margins, relaxing debt ratio rules dubbed the “three red lines” to ease acquisitions by state-owned developers.

It is crucial to prevent a high number of firms in distress. This will allow for development to continue, and reduce contagion risk. Wei-Liang Chang is a credit and FX strategist at DBS Bank, Singapore.

He also stated that forcing developers with leveraged credit to restructure their debts would reinforce investors and developers’ sense of credit responsibility.

Michael Pettis, a non-resident senior fellow at the Carnegie–Tsinghua Center for Global Policy, expressed scepticism that Beijing would make significant progress in addressing property sector debt risks this year, noting that moves such as relaxing the three red lines have simply allowed the shifting of debt burdens to state-owned firms from the more constrained private sector.

China is not really addressing the root issue. It’s impossible. This is an important political year so I think growth will prevail.”

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