13 October 2021
Cogito Ergo Non Serviam
Evergrande Group is one of China's biggest property developers, and it owes creditors the equivalent of US$300 billion. It missed a bond payment earlier this week, but it has a 30-day grace period before it is in genuine default. It missed a couple others last month as well. The main worry for Beijing is that Evergrande will default at some stage, and the contagion will cripple the real estate market before spreading to the wider economy. Whether President Xi knows it or not, he is going to have to bail out the firm and change policies to prevent this from happening again. But can he?
Michael Schulman wrote in the Atlantic, "The basic problem is that China's growth is overly dependent on building things, such as highways, factories, and Evergrande apartment towers. All of that construction keeps economic-growth rates elevated, workers employed, and the country's gross domestic product steadily marching up the list of the world’s largest. But not all growth is created equal. If investment flows into companies and projects that aren't needed or wanted, and thus doesn't offer a return, it pumps up national output in the short term but weighs on the economy in the long run."
That is precisely what Evergrande has done. The rest of the real estate business there is little better. One estimate is that the nation has enough unsold homes to house 90 million people. Even by Chinese standards, that is a lot. Beyond real estate, there are 300,000 companies engaged in the new energy vehicle industry, far more than needed and as many as 25% propped up by the government. They are largely funded with debt rather than equity. The debt levels in China have risen 13 fold in 15 years, and now represent 300% of GDP.
China's economic growth over the last quarter century has been remarkable. Yet, the starting point was so low that the Chinese per capita income is only $10,550, about a sixth of what it is in America. That level puts China 76th in the world, outdone by Panama and Romania.
So, the country has made a lot of progress building capital projects, but it is running into waste and inefficiencies as a result. The solution is to shift away from big infrastructure spending and focus more on consumers. That runs up against all the people who make a living and who get rich from the current arrangements. They will resist changes.
The demography of China explains the need for economic growth. China is growing older. The latest census that was published in May of this year shows the slowest population growth on record. About 20% of the population is 60 or older, and the next two decades will see the 65+ cohort double in size while the workforce actually shrinks. By 2050, some estimates suggest the elderly will be a third of the population by 2050. Taking care of that many who are too old to work is going to strain China's resources to the breaking point and possibly beyond.
George Magnus, a research associate at the China Centre at Oxford University, has stated "there is a plausible case that right now China has reached a kind of plateau in term5f0 its economic dynamism." Even if the growth rate has not reached a plateau, it has decelerated. That is not a desirable situation for policy makers faced with the demographics China has. In addition to aging, the one-child policy of decades past resulted in a gender imbalance as families tried for a boy (improving their odds with abortion of female fetuses or outright femicide). There are now 40 million more men in China than women. Unmarried young men with few economic prospects do not contribute much to social stability.
Evergrande needs a bail-out, but China will also need to fix the economic policies that brought it to where it is now because they are failing. That kind of change is extremely difficult. It is even harder for a government pretending to be communist.
© Copyright 2021 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.