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Evergrande will not cause a 2008-style crisis in China

Credit: Getty

October 29, 2021 - 8:30am

For the past few weeks, people all over the world have been fretting about Evergrande. The company, which is the second largest property developer in China, missed payments on its debt during the summer and last week announced that they would engage in an asset fire sale to meet its obligations. Just this week a new report found that one third of Chinese property companies could be heading towards bankruptcy as a knock-on effect.

Commentators are therefore quick to point out the similarity of these events to what the Western economies experienced in 2008. There is every chance that they’re correct and that the Chinese economy really is on the brink – which, given its size, would surely have knock-on effects for the rest of the world.

But it is just as likely, if not more likely, that these commentators are drawing a bad analogy. 

Even though consumption goods in China are distributed by markets, the investment side of the economy is effectively state controlled. So is the financial system. The Chinese economy is very different to the old Soviet model, but what they do share is that finance and investment is planned by the state.

When housing markets unwind in market economies, they cause havoc in two ways. First, the mortgages and other lending financing these markets go sour. Companies and banks involved in housing development and mortgage lending then find themselves experiencing liquidity crises and often outright bankruptcy. That is what we see at Evergrande. Secondly, housing investment dries up and those working in construction and housing sales lose their jobs. This is how the financial problems bleed out into the real economy. A recession soon follows.

It is not clear that either of these issues would impact China. In the late-1990s, Chinese banks found themselves with mounds of bad debt after the madcap government investment drive in that period. By 2003, non-performing loans were valued at over a third of Chinese GDP. Yet there was no financial crisis. Why? Because the Chinese state set up entities called ‘asset management companies’ (AMCs) that took the bad loans off the balance sheets of the banks. These AMCs were backed by the central bank. In effect, the bad loans were tossed down the memory hole — something that is not hard to do if the state can use the central bank to simply create cash.

What about the impact of a burst housing bubble on the Chinese economy? Well, as we have said, the Chinese state controls investment. So, in theory, they can simply invest in something else other than housing — infrastructure perhaps, or military equipment. Those currently building houses can be employed, via state diktat, to build something else. Given that the Chinese government has explicitly stated it wants to tackle the housing problem, it would be surprising if they were not planning for this.

There are risks. Maybe the Chinese government has not come up with contingency plans. Maybe they have, but maybe things do not end up going according to plan. There are many possibilities. But interested observers need to understand that the Chinese economy is not like a Western free market system. The government calls the shots in China, not the markets. That is where interested observers should be looking.


Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics

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Galeti Tavas
Galeti Tavas
2 years ago

The writer has incredible respect for the CCP, but even they have not got a forest of money trees, and they also have no free lunch, and MMT is not going to work for them better than for the West.

Much of that building was on speck apartments which the fanatical saving citizens bought at extreme cost as pure investment, and so it is something which reaches to the very core of the nation.

Remember, Japan was brought down by real Estate. It was projected Japan would overtake USA as the greatest GDP in the world, till their housing bubble burst in 1992 – AND the Nikkie lost half its value, AND still is not back to that lever thirty years later.

Never count out real estate’s ability to destroy an economy, like the GFC. In fact looking at Western real estate appreciation during the mad cvid response money printing, I rather expect it to correct 30%, and shake things to the core, if/when interest rates rise, the real estate is value is toast. (That the stock market is likely to correct 30-80% as well, is scary.)

J Bryant
J Bryant
2 years ago
Reply to  Galeti Tavas

 and MMT is not going to work for them better than for the West.
That was my thought too when I read the article. I don’t see how any country that’s engaged in international trade and has an internationally traded currency can print unlimited amounts of money without risking inflation. But I’m not an economist.
At any rate, it’s good to see more economic articles on Unherd even if they’re just mini articles.

Galeti Tavas
Galeti Tavas
2 years ago
Reply to  J Bryant

To not be centered on economics at this time is like not talking of Germany in 1932 as the world teeters on the edge of a knife.

People need to be making choices. Not that I have been able, being a doomsday thinker on this I have cash and gold/silver but too afraid of equities and bonds to join in on the huge appreciations – and am just sitting frozen like a rabbit in the headlights….

Christopher Barclay
Christopher Barclay
2 years ago

” … something that is not hard to do if the state can use the central bank to simply create cash.” And this hasn’t been tried in the West?

Galeti Tavas
Galeti Tavas
2 years ago

“And this hasn’t been tried in the West?”

Yes, but few think it is going to work out well. We are not Japan in 1992, where they had the huge Realeastate/Equity correction – because they had a very large Export surpluse, so nothing like us. China will be greatly aided by this – but Japan lost 30 years of economic growth from it.

The coming CBDC is to enable Central Banks to just create money and send it out to Non-Bank entities as cash without having to create debt through Bonds and Treasuries and reserves – just add numbers on the computer to bank accounts directly. It will be disasterious. Totaltarian, and also making us all poor and dependent and under 100% surveillance. China already has its Digital Yuan out and can get the MMT going. (CBDC)

Andrew Fisher
Andrew Fisher
2 years ago
Reply to  Galeti Tavas

I’m not persuaded by those people who seem to believe in some sort of capitalist prelapsarian innocence in the West, but oppose any more innovation in how the state interacts with the market. Limited companies, what, you mean institutions whose directors can walk away from their liabilities? But it worked, in a pragmatic way to grow economies. The UK has been in debt now since Napoleonic times, at one time that would have been considered complete anathema.

Nick Faulks
Nick Faulks
2 years ago

Just like the UK, then. The Government takes over the “bad banks” and fills the hole by printing money. Should be fine.
At least in China many of the people who have profited by bringing about the crisis will have to give back their ill-gotten loot – or worse!

Galeti Tavas
Galeti Tavas
2 years ago
Reply to  Nick Faulks

And when their ‘Bezos’ and ‘Gates, Zukerbergs’ get too big they just disappear them….

The Chinese CCP will NOT relinquish their monopoly on money/power. In the West we have just handed the reigns of power to the tech, finance, Military Industrial, Pharma Industrial, MSM Industrial, Social Media Industrial, the Corporatists, and the Global Elites.

Giles Chance
Giles Chance
2 years ago

If inflation in the US and Europe does not go back down to 1% or 2%, interest rates will have to rise by several %. There will be a global financial crash because many households won’t be able to pay their mortgages and stock markets will plummet. China will be in a better place to deal with this because, as the article says, the Government controls the central bank and the banking system, the country has huge savings, and China, the world’s largest exporter, runs a huge trade surplus which generates large inflows of foreign currency. .

Cheryl Jones
Cheryl Jones
2 years ago

I fail to see why a Chinese company failing should be an issue for the rest of the world. If it is then it just demonstrates further to me that globalisation is a truly terrible idea.