On the case Evergrande, which everyone is talking about, let’s put things in perspective. The massive default of Argentina’s foreign debt (in 2001) was $ 93 billion. Debt restructuring for Greece in 2012: $ 200 billion. When it cracked and triggered the great financial crisis of 2008, Lehman Brothers it had global debts of 600 billion. On the $ 300 billion of debt accumulated by Evergrande – domestic and expressed in local currency – both the pro-Beijing deniers (few) and the alarmist fanatics of anti-Chinese neo-McCarthyism (very many, especially in Italy, in the big newspapers and in the parties) they are wrong almost all of their ratings.
Let’s start by saying that what is happening in China is the result of a change of policy and rules initiated, knowingly, by Xi Jinping and the Communist Party of China. With a specific objective: to limit financial speculation and the bubbles typical of a capitalist market that has grown too much and too quickly.
The government squeeze began a couple of years ago, and was precisely intended to prevent a systemic crisis which could have collapsed the entire financial sector, if Beijing had not started to ‘control’ (i.e. deflate) the bubble in the real estate sector, which accounts for an important slice of Chinese GDP (29%) with strong links upstream and Valley. The Dragon-style ‘shrewdnesses’, or hundreds of new and aggressive private financial and construction / real estate companies, with their respective neo-wealthy patrons, had grown out of all proportion with a trick in which Evergrande, more than the others, excelled. They offered investors land and houses at fake prices, bought at a funny price, with ever-increasing values and bogus balance sheets. They didn’t care, because the risk was being passed on to tens of thousands of apartment buyers and the many banks that financed the purchase.
That model worked great, even for local authorities, banking institutions and families, as long as house and building prices soared, in 100 new cities built from scratch. And for the last 15 years they’ve been going up, and going up, and going up. So is the household debt is splashed far above disposable income. Was it so difficult to spot the incoming black swan? Not at all: exponential increase in prices, financial speculation, indebtedness galore, at a certain moment you go belly up.
Evergrande’s bankruptcy will in fact be a ‘controlled demolition’ and not a ‘messy default’ as happened with Lehman Brothers – many other Chinese companies are at risk due to their highly indebtedness, such as Fantasia, R&F, Suna, China Aoyuan, Minsheng, Ping An – and this is the price the Chinese government is willing to pay to make the financial system less risky. But, at the cost of repeating itself, the CCP acts by following a precise strategy: to reshape the economy towards growth that is more oriented towards consumption and less towards finance. With this reaffirming the “communist” principle of ‘shared wealth’, in a scenario of social stability. Xi Jinping will be able to calm the minds of 1.7 million small investors / speculators who are waiting for the delivery of unfinished houses from Evergrande, and at the same time the government will be able to start the reclamation, indeed the you rejected, of the construction and financial sector, avoiding crack catastrophic?
Yes of course; but the dark side and huge debt on many of these companies, far beyond Evergrande, will litter the ground with corpses. It’s capitalism, baby. Welcome to the club, dear Chinese. So let’s expect more rot exposed in the media and news (including fake) that will affect global markets, and then trials in local courts, torpedoes, compensation, bankruptcies. Stabilizing the domestic real estate market will be a long, arduous and risky process for China. But ultimately the system will hold up.
“The Chinese government has shown in the past that it is capable of managing crises that are serious enough for the economic system, starting from that of 2008-9 (which came from outside) to that of the Stock Exchange in 2015”, said Marco Marazzi, partner in charge of the China Desk by Baker Mckenzie (lived in China for 20 years and speaks Mandarin). “The Evergrande affair – he adds – is certainly much more complex and can also have implications unpredictable but the signs are those of limited state intervention aimed at protecting, for example, the buyers of undelivered homes, employees and small investors, primarily domestic ones. However, anyone who equates this story with that of the recent regulation of the tech sector, reading them as part of the Party’s attempt to control the Chinese private sector, is wrong. The Evergrande case is one in which any government, of any country, would have intervened, given the stakes. They are different things, motivated by needs (and emergencies) diverse, which are by no means united “.
If so, the state will intervene, and the paradox is that “communist” planning, using the typical tools of drugged and extreme capitalism, it will avoid a total debt crisis with international repercussions. After all, the United States after the financial crisis of 2008 did not save the TBTF banks (too big too fail) with a mega injection of congressional cash? I believe that Xi Jinping is aware of a post-ideological truth: communism old fashion does not work, he is sad, poor and a loser. And above all it is ineffective in stimulating a strong and cohesive economic growth that can offer citizens a widespread well-being without folly. Only in this way can China truly be the nation of “modern socialism” by 2050, as stated in the Constitution wanted by the leader. And only in this way will it have the tonnage from superpower with equal interlocutors, ie the United States and (alas – inadequate) the European Union. For Beijing, however, it is imperative that the economy continues to grow without triggering a crisis at Lehman Brothers, because the interests of the CCP are aligned with those of tens of millions of private investors (an alignment that is far from perfect and asymmetrical). Of course, seeing Chinese protesting under Evergrande’s offices is a certainty impression here in the West. The iron fist of an authoritarian government may not be enough. A large-scale crisis cannot be ruled out a priori.
“Beyond the purely financial aspect, the Evergrande affair signals the confirmation of a ‘turnaround“, Says Romeo Orlandi, president of the think tank Asia Observatory and author of the book Malls in China. “The delegation that political power had granted to entrepreneurs to produce greater economic growth has probably expired – and it has done so very well – in fact it has pulled China out of underdevelopment. Thus power and prosperity have been generated better than collectivism could. Now the power that individual entrepreneurs have achieved is a danger to the obsession of check by the CCP. If the stability-growth combination had been instrumental to record-breaking China, now its pace has slowed down. It is therefore preferable to accept lower rates of GDP growth and to maintain the stability, that is, the control of Xi Jinping’s secretariat ”.
Yes, but those who follow finance and markets know that the situation can also evolve with implications unexpected events; the fears of ‘contagion’, now attenuated, still lurk under the radar. How not to compare with the debt-fueled economic booms in Japan and the economies of the Asian tigers before the crash thirty years ago? Non-financial corporate debt in China (not to mention the shadow banking) is even larger today than before the economies of Japan, South Korea and Thailand collapsed in the late 1990s. The skillful management of Xi Jinping has so far averted a major Chinese systemic crisis. But the capitalist excesses, based on individual enrichment and on animal spirit speculative, they must logically be resized. Bottom line: Beijing’s mythical growth rates are set to slow down, as Orlandi predicts. And China’s unique and alternative political experiment in the world will continue to impose itself, with the geopolitical pendulum in constant oscillation between communism and capitalism.