1. Is the Chinese real estate giant Evergrande heading for a resounding collapse that will drag the Chinese financial system behind it too? The answer seems to be no. The outbreak of the financial crisis of 2008. The Chinese government’s control over the financial system is such that it can prevent the shockwaves from spreading.
But even without a financial crisis, Evergrand’s troubles could signal that the Chinese economy is on the verge of slowing down. And more: they expose the regime’s dilemma in Beijing: how to balance the economy without smashing it.
Like everything in China, the numbers involved in Evergrand are huge: its liabilities are estimated at $ 300 billion, it still needs to provide its customers with 1.6 million apartments, and it has 200,000 employees. Its uncontrolled collapse would be a systemic event – which is exactly why, at least according to estimates, Beijing would not allow such an event to happen.
Evergrand illustrates (radically) the fuel.fueled growth model of the real estate sector in China, which is one of the growth drivers of the economy, and also a source of danger. Last year, regulators in China announced credit restrictions in the real estate sector – which escalated into Evergreen’s troubles.
And here lies a series of dilemmas facing China, which this week was described by Prof. Michael Pattis, a lecturer in business administration at Peking University, a former investment banker, and a leading analyst in the Chinese economy. Basically, the relentless surge in real estate credit stems from the belief that the administration will eventually rescue the system (so.called, moral hazard), and this also seems to be what will happen one way or another this time.
But even if one puts aside the danger of financial contagion, or the financing difficulties of real estate companies, the real problem the Chinese government has to deal with, Pattis wrote this week, is “the impossible contradiction between rapid GDP growth and stable debt.” Credit is what enables the Chinese government to meet its growth targets, and “until Beijing learns to accept much slower – but healthier – GDP growth, it will not be able to stabilize debt growth.”
Some are convinced that the slowdown is on the way. “This week, Prof. Kenneth Rogoff of Harvard, the former chief economist of the International Monetary Fund, proposed a calculation that the real estate sector is responsible for no less than 29% (!) Of GDP in China – a figure that competes with Ireland and Spain in the pre.financial crisis.” It is difficult to see how a significant slowdown in the Chinese economy can be avoided, even if the banking problems are contained. “
2. But Rogoff mentions another reason, much more immediate, for the slowdown in the Chinese economy: “The Delta variant, which is much more contagious.” This is not just a Chinese problem of course. It’s been more than a year and a half since the plague, and the corona is still with us.
In some parts of the world, which do not enjoy widespread access to vaccines as in the West, the impact of the Delta is much more felt.
The Delta also stars quite a bit in the OECD interim report, which was published this week, stating that “the recovery continues, but the momentum has weakened.” Among other things, economists from the OECD, the organization of advanced economies, explain there that the delta may also have an economic chain effect.
Closures in Asian countries could disrupt the global supply chain, and translate into higher export prices – that is, higher prices for countries that import from them. Or in other words, for more inflation.
A similar analysis, from an American perspective, was proposed this week by Federal Reserve Chairman Jerome Powell, who explained at a news conference that the re.expansion of the U.S. corona has slowed the recovery of those parts of the economy that are particularly vulnerable to the virus. The increase in the expenditure of American households has also been halted. On the other hand, Powell explained, with the recovery, bottlenecks have been created that make it impossible to easily increase supply in the economy – leading to price increases.
The impact of these bottlenecks, Powell admits, “was greater and more lasting than expected.” It has led to an increase in inflation forecasts for the current year. This may not be entirely surprising. Powell mentioned that just as closing the economy because of the corona was an unprecedented move, so was its opening.
Jerome Powell / Photo: Reuters, KEVIN LAMARQUE
And yet, according to Powell, with the return to routine supply problems will pass, and inflation will return to the target set by the central bank. According to the Fed’s forecast, from 4.2% this year, inflation is expected to fall to 2.2% as early as next year. But not everyone buys this surgery. Prof. Larry Summers, perhaps the Fed’s most prominent critic at the moment, spoke this week in an interview about a ‘temporary’ bottleneck, followed by another ‘temporary’ bottleneck, and so on and so forth.
3. Powell’s analysis, in any case, is not just a theoretical analysis. He explains the Fed’s intention, signaled by members of the Open Market Committee that sets the central bank’s policy, to start reducing their bond buying program as early as this year, and to start raising interest rates, perhaps as early as next year. Monetary policy.
These are decisions that will be felt far outside the U.S. The rest of the world is largely aligned with the Fed’s interest rate decisions, and interest rate differentials between the U.S. and the rest of the world could result in investors’ money escaping from developing economies. In 2013, as the Fed tried to begin to return to routine after the financial crisis, the shock waves shook these economies.
Meanwhile, it is important to emphasize, the global economic recovery from the corona is continuing at an impressive pace. But if in the earlier stages of the plague there was talk of closing and reopening the economy, as if it were a simple mechanical move, today it is clear that the picture is more complex – and meanwhile other variables have been added, such as the China real estate bubble and Beijing’s attempts to rebalance For the decision makers, this is a reality of dilemmas and risk balancing, and it seems that it will continue to accompany us for quite some time.