Evergrande is all the evils of China in one

0
64
Evergrande is all the evils of China in one
1633077177 939998 1633077246 rrss normal.jpg

Xi Jinping wants to digitize the economy under his absolute control, at the cost of immediate growth

Former Prime Minister Wen Jiabao called the Chinese economy “unstable, unbalanced, uncoordinated and unsustainable” 14 years ago. It is not known whether he foresaw that China would one day be beset by a huge housing bubble, overinvestment, excessive accumulation of debt and a shaky credit system, but it has come true. Evergrande has long been at the intersection of these imbalances. By putting her in bankruptcy, Xi Jinping shows that he wants to grab the bull by the horns. As the bubble economy deflates, it will be replaced by a new economic system under his absolute command.

Before the global financial crisis, China’s growth was driven by rising exports and corresponding investment in factories and manufacturing. After the bankruptcy of Lehman Brothers, Beijing launched a massive stimulus plan, financed with borrowed money. In the years that followed, the economy was driven by increasing doses of investment and credit. Real estate was the center of this boom. After surviving numerous setbacks, he earned a reputation as invincible. As the title of a recent book said, it was the “bubble that never bursts.”

Unlike most authorities, Xi was not seduced. Real estate booms provide low-quality or “fictitious” growth, he said. In recent years, China’s return on investment has plummeted and productivity growth (output per capita) has fallen to half its 2007 level. Xi also branded the property boom as a social divider. The development of the land fueled public corruption, which Xi is trying to eradicate. The rise in housing exacerbated inequality – half of the world’s billionaires in the sector come from China – and excluded the youngest. Millions of investor-owned properties have been left vacant.

SEE ALSO  For its anniversary, AliExpress sinks the price of this premium Xiaomi mobile with 12 GB of RAM and 1.5K screen

The pandemic sent the market skyrocketing. Beijing published “three red lines” that limited the use of leverage, and that ended up taking Evergrande to the brink. Home sales have just plummeted. It is a risky move. The value of the home stock is 3.7 times GDP, according to Stewart Paterson of Capital Dialectics. Much of China’s debt is secured by real estate. Almost a third of the activity is exposed, directly or indirectly, to the sector.

No country has ever deflated a housing bubble without experiencing a severe downturn, often accompanied by a financial crisis. There are parallels with Japan. The total value of Chinese property (relative to GDP) is on par with Japanese real estate at its peak in 1990. Credit growth in China has been more extreme than that of Japan in the 1980s. After Tokyo raised rates to burst the speculative frenzy, there was a severe banking crisis and the economy suffered a “lost decade.” At the same time, the fall in the workforce exacerbated the deflationary forces unleashed by the collapse of the bubble. China faces a similar situation.

But Beijing believes that it is better placed. State-controlled developers and local governments are likely to take over housing projects from Evergrande and other private developers. Contract law will not determine how bad debts are settled: bad loans will be spread through China’s opaque credit system and authorities will decide who absorbs the losses. This will help if the country has a relatively limited exposure to foreign creditors.

The economy will almost certainly slow down as the bubble releases air. It is often said that the legitimacy of the Communist Party government depends on its bringing growth. But the secretary general is more interested in “resilience” and “common prosperity” than in GDP targets. Its main objective is not the economic one, but the national “rejuvenation”. Xi is willing to sacrifice immediate growth. Its position is strong enough to confront the vested interests that will suffer the most from the collapse.

SEE ALSO  The Cadastre now has an official application: so you can check how much a property is worth and receive notices on your mobile

In addition, he has a vision of the future. Its China 2025 plan aims to establish Chinese dominance in technologies such as artificial intelligence or robotics. A social credit system will complement conventional credit. The official digital yuan will complement, and perhaps even replace, conventional money. The structure of the country will become more digital. Big data, powered by the internet and hundreds of millions of public cameras, will support Xi’s surveillance society.

Western investors have a lot to process. The immediate impact of the housing decline is deflationary. The change will reduce global demand for raw materials. If the central bank prints money to alleviate debt problems, as seems likely, the yuan could suffer on foreign exchanges. Capital flight could put more pressure on him, but if China dumps its surplus cheap goods on to the rest of the world, trade tensions will resurface.

The country is becoming more dangerous for foreign investors. Beijing’s recent treatment of listed technology and education firms shows that all companies must put the interests of the state before those of shareholders. As debt problems surface, foreign creditors will find themselves at the end of the line. Last week, when Evergrande defaulted on its foreign creditors, it was reported that the interest on its domestic debt had been renegotiated.

The period of “reform and opening up” that began with Deng Xiaoping revived the “China Dream”, the old idea that the demand of the country’s huge population would generate great benefits for foreigners. That dream is dead. Instead, Xi speaks of the “Chinese Dream,” a collectivist project that exalts the nation-state and places the party in total control. Socialism with Chinese characteristics is beginning to look a lot like the communism of yesteryear. Only this time their technology is more advanced.

SEE ALSO  A new system will help you know if your Smart home is really safe