The Chinese real estate crisis: is a “beautiful deleveraging” to be believed in?
This column was previously published in l’Opinion on august 31st 2023.
The West is wrong to speculate on the possibility of a stimulus plan, for this could only remedy a cyclical economic crisis. Today, China finds itself facing a structural crisis in its balance sheet, to which its response will be truly earth-shaking.
Ray Dalio, the brilliant founder of Bridgewater and specialist in sovereign debt crises, would like to believe it. But what are the real chances of seeing the emergence of a “beautiful” rescue plan for China that would combine the fair sharing-out of past losses and priority funding for future increases in productivity?
In one sense, the Chinese government’s denial until the real estate bubble finally burst out seems absolutely classic. However, the crisis facing Beijing is unprecedented in two respects. Firstly, on the negative side, its extent: the real estate sector accounted for up to 30% of GDP, which leads one to expect that overall losses will ultimately be higher than the usual 10% of GDP in such circumstances. Secondly, on the positive side, the fact that, because the sector’s funding comes almost exclusively from domestic sources, Beijing has the possibility of both spreading the losses over time and of making a totally arbitrary choice when it comes to spreading out the burden among the various economic players.
“Zero productivity”. Reason would dictate that the central government should take on a large share of what it has been in charge in the past, by guaranteeing the financing of local entities in remote provinces — the Tiers 3 and 4 — in order to, at the very least, complete any construction projects in progress. However, so far Beijing has refused to do this. In China, the strong rarely comes to the aid of the weak… The banks — the vast majority of which are state-owned — follow the same line, which excludes any restructuring plan for the sector by means of recapitalization and concentration, as was the case in the United States in 2008. State-Owned Enterprises continue to be prioritized when it comes to financing, to the detriment of the private sector, producing side-effects of stagnating production and exploding unemployment levels for young graduates, now estimated at almost 50%.
Households are therefore bound to be the main victims of financial repression. Firstly, because the value of their assets — 70% of which are invested in property — has plummeted. Secondly, because future wages are likely to hardly rise, enabling Chinese exports to benefit from a “competitive deflation”.
The Chinese solution that is emerging seems to require a complete reworking of its economic power, now based on a war economy, i.e. control of production, and self-sufficiency.
The West is wrong to speculate on the possibility of a stimulus plan, for this could only remedy a cyclical economic crisis. Today, China is having to face up to a structural crisis in its balance sheet, the result of a leveraging much faster than the West did during the 2010s.
The Chinese solution that is emerging seems to require a complete reworking of its economic power, now based on a war economy, i.e. control of production, and self-sufficiency. The failed “zero Covid” policy is giving way to the equally harmful policy of “zero productivity”. In the coming years, this new policy risks limiting Chinese successes to those manufacturing export sectors deemed to be the sectors of the future, the major beneficiaries of Chinese deflation on a global level against a background of reflation in the West.
If this blueprint is confirmed in the coming months, then this a very long way from the “beautiful deleveraging” called for by Ray Dalio.
This is why it is urgent for every Board of Directors of European multinationals to draw the consequences of the fact that 2022 saw the closing of the thirty year cycle that began in 1989.
