Overblown fears for China’s economy

CHINA’S real estate crisis seems to have triggered a wave of dire warnings about the outlook for the entire economy. Among others, former US Treasury secretary Larry Summers, an economist of some repute, has made ominous comparisons between the current situation in China and the onset of Japan’s decade of stagnation. Yes, Evergrande and Country Garden, China’s biggest housing developers, are in trouble. But does it mean that the whole Chinese economy is at a tipping point?

Much of the pessimism seems to stem from the failed restructuring of Evergrande’s foreign debt. Until Beijing launched an investigation into Evergrande’s founder, the company seemed close to a multi-billion dollar restructuring deal for part of its debt to foreign bondholders. The proposed deal would have given these bondholders a stake in Evergrande’s other assets such as its property maintenance and electric car wings. But Beijing’s securities authority refused to allow Evergrande to issue new securities to close the deal. Now those bondholders warn that its abandonment could cause an uncontrolled collapse of the company. In turn, it is argued, that would trigger an implosion of the whole of China’s home-building sector.

How big is the problem? A recent analysis of property market exposure of 18 top Chinese banks showed that they had the equivalent of US$40 billion in non-performing loans to home developers. In addition, China’s municipal authorities face problems because of the stagnating property sector. Many municipalities, which would finance local development from land sales, maximised revenues by limiting land supply. Others have had no qualms about forced resettlement of old village communities to boost demand; redevelopment has always pushed people to buy new homes. Unfortunately, the Covid-19 pandemic and subsequent shutdowns unravelled this cozy arrangement.