A peeling logo of the Evergrande Oasis, a housing complex developed by Evergrande Group, is seen outside the construction site where the residential buildings stand unfinished in Luoyang, Henan province, on September 16. Photo: Reuters
Opinion
Macroscope
by David Brown
Macroscope
by David Brown
China Evergrande debt crisis shows the need to fix global capitalism’s flaws
Rather than being China’s ‘Lehman moment’, the property giant’s woes reflect lingering global problems with excess leverage and paltry regulation
Policymakers worldwide should be intervening more with tougher regulation, greater prudential oversight and improved transparency to ensure global stability
World financial markets are wrong to think Evergrande’s deepening debt debacle is China’s “Lehman moment” or a crisis of Chinese capitalism. If anything, it’s a crisis for global capitalism in a world which is largely overspent, over-lent and seriously underregulated.
The world is still disentangling itself from the aftershocks of the 2008 global financial crisis, which was a by-product of excessive speculation, reckless financial engineering and global policymakers who were pretty much asleep on their watch.
Thirteen years on and the world hardly seems to have learned its lesson. The subsequent explosion of global debt, the proliferation of easy money created by the world’s central banks, and the volatility of asset prices and global economic activity suffered during the pandemic leave the world in far worse shape to cope with future shocks.
There is no quick fix for a world in deepening crisis and no reason for complacency, either. We need to be quick to clear up the mess.
Policymakers still need to tackle extremes of education, poverty and wealth inequality around the globe and address the shortcomings of the corporate and financial world. It’s certainly a wake-up moment for China, but Beijing seems to be responding to the need for change.
02:28
Angry protest at headquarters of China Evergrande as property giant faces liquidity crunch
Angry protest at headquarters of China Evergrande as property giant faces liquidity crunch
The fallout from Evergrande’s US$300 billion debt saga should be contained domestically. Beijing is moving in the right direction by tackling the issues of corporate governance, financial excess and wealth inequality at home.
It’s not about reining in the rich and quashing entrepreneurial zeal, but providing better and fairer opportunities for all of China’s 1.4 billion citizens. China’s economic success must be shared more equitably and, if that’s the key to hitting sustainable growth between 5 to 6 per cent over the longer term, so be it.
China has evolved from a centrally planned economy to a mixed-market economy, but occasional nudges from state intervention will be needed from time to time to help smooth the process along the way.
There are important lessons for the world, as well. Global policymakers should be intervening more with tougher regulation, greater prudential oversight and improved transparency to ensure global stability is not put at risk again and the events of the 2008 crash are never repeated.
Excessive risk-taking in financial markets must be discouraged, the true cost of capital needs to be reflected in deal-making and global tax avoidance brought to heel. In the financial markets, governments and taxpayers should never again have to pick up the tab for bailing out banks, as happened in the wake of the 2008 crash.
Global legislation should be drafted to ensure living wills that provide for orderly failures for banks in the event of another major credit crisis. Senior bank management should be held wholly responsible, with custodial sentences where financial malpractice is proven.
The introduction of a global financial transactions tax would definitely help rein in excessive risk-taking and slow down overtrading. This would also raise vital revenue for governments to pay for improved education, welfare spending and health care.
Much tougher scrutiny and regulation will be needed for more risky financial instruments such as options, swaps and other esoteric products where excessive position-taking has added to financial instability in the past.
Lawmakers need to consider whether the actions of hedge funds and fast-money speculators need much closer supervision, too. This could include possibly regulating a return to long-only investing, not only in times of stress but also over the long term.
It seemed an appropriate measure during the 2008 crash when the short-selling of financial stocks was temporarily suspended, but it might create more stable market conditions if it became a permanent fixture. China seems to be taking steps in the right direction by declaring a ban on cryptocurrencies.
In the corporate world, better reporting transparency, ending cross-border accounting anomalies and a crackdown on overinflated executive pay are key prerequisites for better corporate governance and more responsible working practices.
Recent initiatives to introduce a global minimum rate of corporate tax would go a long way to ensure big multinational enterprises and hi-tech companies pay their fair share of tax obligations in countries where they operate. It’s time for large corporations to pay more tax and ease the load on governments and taxpayers hit by the pandemic.
The world must get back on track for global growth averaging around 3.5 per cent to 4 per cent in the future. It is up to governments and central banks to stop the rot and fix things.
David Brown is the chief executive of New View Economics
