Beijing is facing a dilemma. If it steps in to bail out Evergrande, what message will that send to other heavily indebted developers? If it does not help, the fallout could spread to other sectors of the economy.
Nobody really foresaw the implications of the fall of Lehman Brothers more than a decade ago. Jimmy Chang , the chief investment officer at Rockefeller Global Family Office, thinks the ripple effect could extend beyond China. They would probably pursue their money in international courts. The demise of the company is expected. Hence, home buyers and suppliers are most important among its stakeholders.
The only certainty is that China is returning to extreme state intervention, private industry be damned. In the starkest example of state control, China wiped out its entire for-profit education sector in July, sending markets in the US, where some of the companies were listed, into a tailspin. Part of the upheaval, it's important to note, is also about power.
By moving to rein in China's wealthiest citizens, Xi is effectively hoarding power for himself and the CCP. Jack Ma, the billionaire founder of Alibaba, was once a ubiquitous presence in Chinese society. But since the government started clamping down on his businesses, he's largely disappeared from view. Last month, the former chair of China's top liquor maker was sentenced to life in prison for taking bribes.
There is danger to this lack of power sharing and pluralism of opinions. Historically, the CCP has been a tug of war between openers and closers — those who want to welcome outside market forces and those who seek to restrict foreign access.
But now the balance of power has shifted. Xi is a defiant closer, and his consolidation of power — including a lifetime appointment to the presidency — has left no pro-opening opposition to push for a course correction should things go awry.
And things have a good chance of going awry. As Beijing tries to move the economy toward a new, more insular model, it will have to avoid the land mines left by the old one. Consider Evergrande, now teetering on the edge of default. Xi's willingness to tolerate the credit squeeze on big developers shows just how committed he is to remaking the economy.
Last summer, to deflate the property sector, Beijing introduced new credit metrics known as the three red lines. Developers were required to hold more cash so they could cover their indebtedness if things went sideways. Evergrande couldn't raise the money — and it's not the only one. Investors around the world still don't know when — or whether — the Chinese government will stop the bleeding.
At the end of September, Chinese authorities met with the state-owned banks to let them know their role in all of this — above all else — would be to protect homeowners and keep the economy going, without resorting to their old debt-driven tricks. Once again, walking a tightrope. The property fiasco also means Beijing needs to run a confidence game on two fronts. Investors need to believe the Chinese government can figure out how to restructure the most indebted property developers without causing a sudden crash for the real-estate sector — a task that will become more difficult as more developers show signs of strain.
And consumers need to have the confidence that buying homes with cash in the midst of a credit crunch is a smart move, in the expectation that property values will keep rising. That, in turn, could trigger a plunge in real-estate values and send Chinese banks — and an entire world of investors holding their debt — careening into chaos. The balancing act would be tricky to manage under any circumstances.
But it's made far more difficult by China's sudden energy crisis. Electricity prices have more than doubled this year, as pandemic lockdowns lifted and demand for goods soared. China's domestic coal stores were already down, thanks to the government's earlier wave of mine closings, and Beijing made things worse by banning coal imports from Australia, which was pushing to investigate the origins of the coronavirus pandemic.
Gunter also speculated that an economic deceleration might turn China further into itself. By providing your email, you agree to the Quartz Privacy Policy.
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