The President Xi Jinping is facing the 'Lehman Brothers moment' of the China, whose financial system is on the brink of a full-blown crisis following the crash Evergrande, unless Beijing intervenes and takes radical action. The difficulties of Zhongrong International Trust, which sells esoteric financial products, are worrying investors because they are adding to the serious problems of real estate giants Country Garden and Evergrande (numbers one and two in the sector, burdened by 500 billion dollars of aggregate debt), raising fears for the stability or for a possible shock to the Dragon's economy, already moving at a slow pace.
With the yuan at its lowest level in 16 years against the dollar, the sharp contraction in exports and domestic demand, and foreign direct investment slowing down (-4% in the first seven months), the China risks falling into the classic liquidity trap. Cai Fang, a respected economist at the Chinese Central Bank (PBOC), has raised the alarm and called for draconian measures such as a mega injection of 550 billion dollars into the economy to stop a deflationary psychology and families who, as a result, scale back their plans.
“The most urgent imperative now is to stimulate consumer spending. We need to use all reasonable, legal and economically feasible channels to put money in people’s pockets.”, Cai recently wrote boldly on China Finance 40, the opinion forum of the mandarin elite. The belief is that the current phase is approaching the decisive moment faced by the US Treasury in 2008 after the collapse of Lehman Brothers, or by the eurozone in 2012 when Italy and Spain were at risk.
Chinese people have endured three years of endless anti-Covid lockdowns with less government support, sapping the finances of families and millions of small family businesses. A large portion of the population has cut spending to rebuild evaporated savings, helping the expected rebound after the lifting of the “zero tolerance” policy for Covid in late 2022 quickly fade. The latest events in China’s real estate market have so far failed to have a contagion effect on global financial markets, but domestic stresses have become evident.
Evergrande's bankruptcy filing in the US (formerly Chapter 15 to protect offshore liabilities of $31,7 billion including bonds, guarantees and repurchase obligations) has brought tensions back into the sector: the Shenzhen-based group has specified that the filing “it is a normal offshore debt restructuring procedure and does not involve filing for bankruptcy”. But the bottom line is that the same fate could soon befall Country Garden, which has begun to default on some bond payments: the Hong Kong Stock Exchange, not by chance, has decided to remove the stock from the Hang Seng index starting from September 4 in favor of Sinopharm Group, a recurring name during the Covid-19 crisis.
The former British colony's stock market, the one most affected by the latest turbulence, fell another 2,05% today, entering a bear market due to a loss of more than 20% from its January 2023 highs. Stock markets on a global scale, from Europe to the USA, ended up in the red.
“China faces the risk of two major economic and financial problems merging and feeding on and being amplified by financial instability”, noted Mohamed El-Erian, investment guru of Wal Street. First, “insufficient internal growth in the face of external headwinds”, secondly “long-standing pockets of debt and leverage” which end up affecting growth, confidence and availability of capital at a system level.
On all this, El-Erian wrote on X (formerly Twitter), “The authorities' policy responses have yet to address both issues in a determined manner”. The underlying reason remains the resolution of the great debt bubble, a factor that looking back is strangely similar to the turbulence of over a century ago in the late Qing dynasty, which was at the root of its downfall.
Article published on 18 August 2023 - 20:25
