China won't come to the promoter's rescue
Most indebted real estate in the world
Beijing abruptly redirected its policy towards domestic demand (especially investment), a model fueled by a massive indebtedness of the private sector (companies and families), generating a debt bubble that seems infinite, but which like all of them is unsustainable in the long-term.
Beijing and its Politics of 2008
China has sought for its economy since mid-2008 to maintain notable growth and the solution was to stimulate domestic demand through credit to companies and households.
Now, Beijing wants a different, sustainable system, based on domestic consumption, more egalitarian, and for the State to regain control of the economy. What they have called the path to common prosperity.
However, what originated in 2008 and its estimated consequences on the risk of basing growth in debt on negative aspects ranging from inefficiency in resource allocation to changes in market perception, brought with it a scenario that far from having a positive long-term impact, caused the country's private debt to reach levels very close to 300% of GDP, compared to 117% in 2008 and in the social aspect, inequality, excesses and imbalance in the distribution of the wealth.
Consequently, the recent changes initiated by China, in response to a combination of measures and announcements by the authorities that have already had a strong impact on the markets: reflecting a repression on the technology industry, greater control of credit, billionaires donations of great fortunes (at the request of the government), measures and veto towards the crypto system, reduction of emissions and pollution (generating an energy crisis), the non-rescue or refinancing of shell companies. On this path to a Common Prosperity, it is present at the beginning of the Evergrande journey.
The past 18 months, a large number of Chinese state-owned companies defaulted on their loans, raising fears about China's reliance on debt-driven investments to support growth.
The fall of Evergrande may be a reflection of this turning point: pain in the short term, to achieve a more sustainable, inclusive and solid economy in the long term.
Greater control and repression over the sectors that have been the engine of growth can significantly weigh down GDP and employment in the short term. In addition, there is a risk that these measures will have a more lasting and damaging impact on activity, because as JP Morgan points out, 60% of the wealth of Chinese households is in housing.
If the real estate market suffers, so will house prices, which will have an impact, not only on developers and real estate companies, but also on the wealth and consumption of Chinese households.
Finally, it seems clear that these measures aimed at achieving a more egalitarian and 'just' country will also have an impact on China's competitiveness in the world.
This is one of the great dilemmas between politicians and economists, perhaps also in society. Choose between a high-growth, competitive, but more unequal economy or a more egalitarian, but less competitive, and lower-growth economy. Alicia García-Herrero believes that China is now going to bet on the second: Common Prosperity, which will make China less competitive and, perhaps, even fairer.
Both are good news for the world.