HONG KONG (Reuters Breakingviews) – China’s second-largest developer Evergrande has frightened creditors owed nearly $15 billion into converting obligations into unlisted shares. Details are scant, but this marks another miraculous escape for founder Hui Ka Yan regardless. The fact that creditors accepted this deal highlights how real estate has trapped policymakers.

Earlier in September Reuters reported that Evergrande had sent a letter to the Guangdong provincial government asking for accelerated approval to float subsidiary Hengda Real Estate via reverse merger. It warned of risk to China’s financial stability if Evergrande failed to meet a January listing deadline, which would have triggered some 144 billion yuan in payments to backers like electronics retail giant Suning. Evergrande said the letter is fake. But the developer’s situation is undeniable – 400 billion yuan of short-term debt as of June – and Evergrande stock and bond prices fell in response to the report.

Yet within few days Hui had managed to persuade creditors holding 80% of the obligations, including Suning’s chairman Zhang Jindong, to appear behind him during a signing ceremony in which they pledged to renounce their claim to payment and retain shares in unlisted Hengda instead. That sounds like a much worse deal, especially since the listed state-owned developer that was supposed to reverse-merge with Hengda is showing signs of very cold feet. On Sept. 27 it reiterated that such a restructuring would be “unprecedented”.

Chinese officials appear averse to letting Hui cut debt levels – already in excess of Beijing’s “three red lines” – by foisting risk onto retail stock investors. But knowing that, why did so many Evergrande creditors accept a proposal that converts hard cash payments into hard-to-offload equity stakes? It’s possible the offer was sweetened with higher dividends, but not everyone is biting: state-owned Shandong High Speed Group, owed over 20 billion yuan, is holding out.

While officials may not want to help Hui wriggle out of trouble via stock exchanges, they had cause to lean on investors to accept a compromise. An Evergrande default, after all, would destabilise a sector that contributes as much as a fifth of economic activity, rattle financial markets, and could hit leveraged peers like Country Garden. Companies that borrow too much end up owning their lenders – and their regulators.

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