Tribune. The financial woes of the second largest Chinese real estate developer Evergrande have revived questions about the sustainability of Chinese growth. While the Communist “Party-State” is striving to give itself the means to control everything, and twelve months before a Congress which must keep Xi Jinping in power beyond the two usual terms of office, the materialization of this known risk cannot be reduced to its sole financial dimension.
Evergrande is the symbol of the limits of an economic model from which Beijing wants to extricate itself.
In 2008, to cope with the fall in exports and foreign investment, the engines of growth at the time, the Chinese authorities opened the floodgates of credit. The urgency of the situation and the close links at the local level between political authorities, financial institutions and real estate companies have directed this manna towards the construction sector, which can be quickly mobilized and greedy for labor.
29% of GDP
A decade of impressive growth followed, with a certain financial laissez-faire attitude. The strong credit momentum, coupled with limited investment opportunities for households, has ensured a continued rise in house prices, boosting investor appetite. In doing so, real estate as a whole is currently responsible for 29% of gross domestic product (GDP) in China, compared to 27% in Spain, and 20% in the United States in 2007.
The successive efforts of the central authorities to moderate this dynamism have at best only stabilized the phenomenon. The absolute priority long given to growth and employment, coupled with the reluctance of local actors more or less legitimately interested in maintaining the status quo, explain these successive failures.
This environment has enabled a small real estate developer in Guangdong province to grow from $ 3 billion (around 2.6 billion euros) in assets in 2007 to around $ 375 billion today. At the same time, its debt exploded to reach a liability equivalent to 2% of Chinese GDP.
Customary financial “innovations” intended to circumvent regulations, the consolidated liabilities of Evergrande could amount to 3% of GDP (310 billion dollars). Already in 2017, regulators ended up banning the management of its insurance branch from the markets. The matter had ended there, despite unusually strident exits by regulators.
Speculation and nepotism
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