GOOD MORNING FROM LONDON
I return for the second day in succession to the toxic issue of the world’s most indebted real estate developer, Evergrande, which, says the FT today, is on the verge of default. Troubles “are reverberating across China’s property sector and the world, revealing a very rational reason why long-term interest rates would not rise too far: the global economy is heavily indebted and too financially fragile to handle tighter credit conditions.”
Evergrande’s outstanding debts of more than $300bn represent just 0.6 per cent of total credit in China, but the worry in situations like this is the fall-out effect of a high-profile default. In recent months President Xi Jinping has been cracking down on the excesses of capitalism, including the wealth and power of tech tycoons, and the rampant speculation and rising debts of the property sector. The problem is not just for China but for the world as China is the main engine of global growth.
Beijing has preferred to keep economic growth going and whenever a company of any consequence gets into difficulty, authorities have stepped in with a bailout. This time it will be different and the demise of Evergrande will be managed over time and not in a one-off Lehman type total default.
Beijing will have to protect its 1.6m citizens who have invested hard-earned savings in Evergrande’s unbuilt apartments and at the same time, maintain overall economic growth. Stability will be key as China is weaned off the debt-fuelled form of capitalism that the world has been practising for years.
It is not a matter of Xi Jinping being at odds with the 1980’s policies of Deng Hsiaoping. After the comprehensive failures of the Cultural Revolution, Deng was right to focus on white cats + black cats to bring about growth + prosperity. Today, Xi Jinping will seek to maintain the same growth/prosperity as he reins in the excesses of the cats.