Xi Jinping plunges the Chinese economy into a shoal

Chinese President Xi Jinping


Huang Jingwen/Zuma Press

Maybe China should follow the usual economic rules after all. After many years of pursuing an economic strategy dependent on a housing boom, Beijing is discovering that unwinding these excesses in a state-dominated economy is no easier than anywhere else.

This big real estate denouement enters a new phase this week as Evergrande Group, the country’s most indebted property developer, finally looks set to tip into insolvency. The company has struggled for months to fend off the wolves and revealed on Friday it owed $260 million on a credit guarantee it may not be able to pay. It was set to default on an $82.5 million bond interest payment as we went to press Monday.

In typical Communist Party fashion, the rollout may have already begun without an official announcement. Guangdong provincial government officials appear to have moved into the company’s headquarters, and Beijing released additional liquidity into the banking system over the weekend, presumably to avoid financial instability in the event of a default. Attention is also on other real estate companies such as Kaisa, which is negotiating with creditors to avoid defaulting on a $400 million bond due Tuesday.

Everyone, including Beijing, expected it to be messy. President Xi Jinping foresaw some upheaval when he introduced tougher borrowing limits for developers last year. To the extent that state developers may be waiting to absorb the assets of struggling private competitors, the turmoil is also advancing Mr. Xi’s goal of consolidating state economic control.

What surprises many, but shouldn’t have, is how quickly these shocks radiate outward. The dizzying fall in property sales by developers – down around 38% year-on-year in November for the top 100 companies – could be much steeper than Beijing predicted. One explanation is that in a system that relies as much on moral suasion as on explicit regulation, banks may have enforced last year’s credit restrictions too zealously.

The longer this land decline persists, the more pressure it will put on local governments, which finance themselves through land auctions. These auctions are held three times a year, and of the 700 plots put up for sale in September in cities across the country, about a third have been withdrawn due to lack of interest, the South China Morning Post reported.

This is starting to weigh on the wider economy. Recent surveys of executives raise fears of a contraction in manufacturing and a weakening of optimism in services. The economy grew only 4.9% year-on-year in the third quarter.

This can only partly be explained by Beijing’s erratic, draconian and implausible zero Covid strategy on travel restrictions and wild lockdowns. Real estate credit issues are likely filtering through China’s gray financial market. For example, suppliers to real estate companies will struggle with how to value their accounts receivable, which are often traded between small businesses instead of cash or normal credit.

No wonder Beijing is cold-eyed. In October, the authorities began pushing banks to apply credit restrictions less scrupulously. Local governments can circumvent the rules to allow cash-strapped developers to continue buying land. Mr. Xi can also rely on state developers to stabilize the market by buying land and taking over projects abandoned by insolvent private companies.

But this bubble burst may be progressing beyond the point where Beijing can easily control it. While it remains true that China’s relatively closed financial system is likely to prevent developer failures from escalating into a global financial crisis, the slowdown in China’s real economy points to risks for China’s trading partners. . No one should be happy about a Chinese ownership collapse, but no one should be fully convinced that Mr. Xi can avoid it.

Main Street (6/28/21): If Joe Biden intends to outdo Beijing, Milton Friedman surely still offers a more compelling model than simply copying Xi Jinping’s government-led approach. Images: AP/Getty Images Composition: Mark Kelly

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