China policy uncertainty - Starting to rise, but not like last year

Country risk is associated with policy uncertainty. What makes equity market risk premia differ across countries is the business policy environment which includes tax, regulation, fiscal, trade, and monetary policy. If uncertainty rises in these areas, investors will want to be compensated for policy unknowns. 

Clearly, there are unknowns concerning the disposition of Evergrande where the rule of bankruptcy law is unclear. This event uncertainty is present everyday as news reports and analysis describe the lack of clarity on what will happen with a potential failure that will run into the hundreds of billions.

Evergrande is not an isolated incident of an unknown solution in a world of China policy certainty. The Economic Policy Uncertainty Indices for China show an explosion over the last two years as measured by mainland newspapers and the South China Morning Post SCMP. Uncertainty has fallen from highs over the last two years but is still at elevated levels and may be poised to grow higher. For the more general investor, the uncertainty index is a better measure of the overall business climate than a single company event.