VShina Fortune Land, RiseSun, Evergrande, Fantasia Holdings: the listing of the names of the major Chinese real estate groups is a veritable Confucian catalog, steeped in positive morals, evocative of a prosperity that some had imagined, a little too quickly, to be eternal.
The financial woes experienced for several weeks by Evergrande (“great forever”), the second largest Chinese promoter, whose liabilities are equivalent to the gross domestic product (GDP) of Greece, threaten to cause a cascade of failures in the sector. About ten groups are under surveillance. Fantasia has already announced that it will not be able to honor its debts. The seductive story patiently woven by Xi Jinping since the Covid-19 crisis, from which China has emerged stronger than ever, is being shattered.
The Evergrande sinking is not a “black swan”, these unforeseen events likely to cause chain catastrophes precisely because of a lack of anticipation. On the contrary, it is the symptom of a situation of over-indebtedness which has lasted too long and which the Chinese government has decided to tackle head on.
In August 2020, Beijing thus whistled the end of the game by considerably strengthening the prudential measures imposed on real estate developers to finance their projects. Unlike the 2008 subprime crisis, it was therefore the political authorities who initiated the generating event of the current crisis, nothing to do with the contagious panic that gripped investors during the collapse of the Lehman Brothers bank. Another difference with 2008: Chinese banks are under the control of the regime, making it possible, at its whim, to contain the fire. If the scenario of a generalized financial crisis is unlikely, on the other hand, the macroeconomic impacts promise to be gigantic.
Rappelling rope
The Chinese economy suffers from excessive private debt. It stems from the conditions under which the government has orchestrated the country’s economic catch-up in recent years. Real estate was the main driver, to the point of today weighing almost a third of the GDP. It represents 74% of the heritage of the Chinese, against 61% in France and 38% in the United States.
This weight means that, until recently, as soon as the Chinese economy threatened to slow down, the sector was systematically used as a rope to restart the machine, by inciting the financial system to support developers in a mad rush for urban development. . Since 2011, Beijing has tried to stem real estate speculation four times. Each time, the economy quickly stalled, forcing the authorities to step back on the debt accelerator.
You have 53.85% of this article to read. The rest is for subscribers only.