Evergrande’s plight shows that China is at risk of corruption from capitalism


China’s economic reforms

The author, Morgan Stanley Investment Management’s global expert, is the author of ‘The Ten Commandments of Good Practices’

For years commentators have warned that declining yields indicate that the retail market is growing exponentially, unaffected by the rapid recovery in the world and is distracted by the purchase of large banks in the middle or of the epidemic. Now, developments in China show that the stock markets are not for nothing.

The world’s leading real estate broker, Evergrande, is about to change. Its problems are reverting to China and the rest of the world, revealing a clear reason why long-term interest rates will not go far: the global economy is heavily indebted and is not financially viable enough to deal with bad debt. We are trapped in a debt trap.

China has been at the very end of this quagmire. By the end of the global financial crisis in 2008, debt levels had risen sharply in the United States and many European countries. Since then, China has managed to pay off its debt: a domestic debt that companies and corporations have raised almost 100% to 260% of total exports to China, accounting for about two-thirds of the world’s largest.

By early 2016 China was on the brink of recession. Regular prices were rising rapidly. Capital was out of the country. In order to address the global financial crisis, the US Federal Reserve had to abandon stricter spending plans, and Chinese officials had to invest more in the organization.

Over the next five years, China has seen a significant reduction in the number of loans it can expect, given the rising economic climate. The new asset, led by digital companies in the private sector, was debt-free and grew significantly. Technology now accounts for 40% of China’s economy, up from 20% in 2016.

Digital Financial Column Chart as a GDP (%) indicating growing Chinese technology

Back then, however, the debt bomb was still there. After 2016, private loans also raised another 20-fold share as a share of GDP, while households continuously borrowed mortgages. Many continue to increase the boiling of the house. About 40 percent of Chinese banks are now part of a regional group.

Evergrande’s best loans for more than $ 300bn represents only 0.6% of total debt in China, but concerns such as this always affect the spread of any high-level crisis. Prior to 2008, the real estate market in the US subprime rose to just $ 600bn and threatened to end the global economic system.

Many economists say China will not allow Evergrande to continue to default on its debts. But this time politics is in turmoil.

Chinese President Xi Jinping is trying to revive a form of socialism that reminds us of Mao Zedong’s time. His government has begun dealing with the multiplicity of capitalism, combining wealth with the power of technical expertise, as well as the growing ideology and debt that is rising in the financial sector.

The problem: what happens in China is no longer the case in China, which is the world’s largest engine of growth. China in many ways, China is pursuing the same form of capitalism as many western countries, in particular, are taking on increasing debt.

The result is economic growth. As its most developed enemies from the US to Japan, China has developed an economic system that requires constant government support. Policy makers continue to grow economically in spite of it, and they often fail to rigid the idea even in the face of economic or financial crises. As long as the next company gets into trouble, the bosses stay intervened by bailout. This is especially true in China, where in recent years fixed prices have become much lower than in the world.

Hoping that the government would step in to address the growing problem, investors around the world have not released any money to China. But if Xi leaves the past, by clearing the debt and allowing the wrongs to be seen, it could lead to the collapse of the global economic system.

What we need to witness in the coming months is a struggle between a leader who has the power to change his country, and the financial crisis that results from debt repayment. Meanwhile, markets continue to claim that prices are too high, even for a strong leader like Xi, to abruptly stop China from borrowing the country’s long-standing credit system.



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