…What Evergrande is telling us now is that the market is cresting.
But as property developers began to incur extraordinary levels of debt, the state recognized the need to deleverage the sector before the bubble burst to catastrophic effect. Last year, new regulations, known as the Three Red Lines, forced developers to tighten up their financing arrangements. One way to read Evergrande’s struggles is as a giant correction that the government actually wanted: a shake-out of a highly indebted sector, set off by the government’s reforms. “What Evergrande is telling us now is that the market is cresting,” said George Magnus, the former chief economist at Swiss bank UBS. Another way is to see it as a side-effect of China slamming the brakes, slowing down one of the hottest generators of its growth story. Rogoff and Yang argue that a 20% drop in real-estate activity, even without a banking crisis, could take as much as 10% out of the country’s GDP.
Experts like Howie say there are few signs of a replacement for the property sector, the rocket-fuel that has been powering China over the past two decades. As Evergrande’s missed bond payments pile up, economists says China will have to find a new engine for growth, such as consumption. “This is a tipping point for Chinese real estate,” Magnus said.
The threat of China’s tech crackdown
As China’s government wrestles with its property woes, authorities are also fighting on a second front with entrepreneurs, in an apparent bid to both mitigate the worst effects of market forces and exert greater control over the private sector. Beijing has dismayed its private-education sector by enacting strict new rules, trying to limit both the expenses incurred by students and the intense pressures felt by them in a hyper-competitive academic environment. Shares of New Oriental, the leading tutoring company, plunged by 70% in Hong Kong, leading the slump of fortunes for several other education firms.
The country’s tech companies, meanwhile, have scrambled to pledge their profits to charity after the government cracked down on gaming time for teenagers, launched some of the world’s strictest data laws, gave record fines to Alibaba and its peers on antitrust grounds, and promised to review companies seeking overseas listings much more strictly. Shares of Didi have shed more than half their value since going public in the US in July.
China’s economy — the 2nd-largest in the world — is teetering on the brink of disaster.
Since this spring, Beijing has canceled initial public offerings, fined tech companies billions for antitrust violations, forcibly shut down China’s entire for-profit education industry, and sent CEOs running for the exits to avoid the government’s ire. Even more dire, the Chinese megadeveloper Evergrande recently started missing payments on its more than $300 billion in debt, shaking global markets. The convulsions have woken the world up to a startling new possibility — that Beijing may be willing to allow some of its private corporate behemoths to collapse in a bid to reshape the economic model that made China a superpower.
The upheaval, spanning multiple industries and vast swaths of the country, is the result of one giant issue: China’s inability to borrow or buy its way out of its current economic crisis. For decades, the country relied on cheap labor and eye-popping amounts of debt, handed out by government-owned banks, to fuel economic growth — pouring money into massive apartment developments, factories, bridges, and other projects at lightning speed. Now the country needs people to actually use, and pay for, everything that’s been built. But the bulk of China’s population lacks the income needed to shift the economy from one driven by state investments to one sustained by consumer spending.
As a result, China finds itself stuck with a system that is overbuilt and overindebted. Take the country’s $52 trillion property market, of which the Evergrande mess is the poster child. With money easy to borrow, real-estate speculation became a popular way to store and build wealth for China’s young middle class. One academic described this model to me colorfully as an “addiction to real-estate cocaine.” It’s also been called a “treadmill to hell.”