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The View | China’s changing growth model, not Evergrande, is the top threat to prosperity
- The new emphasis on redistribution plus re-regulation strikes at the heart of the reform that has underpinned China’s growth since the 1980s
- The Evergrande crisis will pass, but a regulatory clampdown in conjunction with a push to redistribute wealth could rewind the Chinese miracle
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All eyes are fixed on the dark side of China. We have been here before. Starting with the Asian financial crisis of the late 1990s and continuing through the dotcom recession of the early 2000s and the 2008 global financial crisis, China was portrayed as the next to fall. Yet, the Chinese economy has defied gloomy predictions with a resilience that took many observers by surprise.
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Count me among the few who were not surprised that past alarms turned out to be false. But also count me in when it comes to sensing that this time feels different.
Contrary to many, I do not think Evergrande Group is the problem, or even the catalytic tipping point. Yes, China’s second-largest property developer is in potentially fatal trouble.
And yes, its debt overhang of some US$300 billion poses broader risks to the Chinese financial system, with potential knock-on effects in global markets. But the magnitude of those ripple effects is likely to be far less than those who loudly proclaim that Evergrande is China’s answer to Lehman Brothers, suggesting that another “Minsky moment” may well be at hand.
Three considerations argue to the contrary. First, the Chinese government has ample resources to backstop Evergrande loan defaults and ring-fence potential spillovers to other assets and markets.
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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
With more than US$7 trillion in domestic savings and another US$3 trillion in foreign exchange reserves, China has more than enough capacity to absorb a worst-case Evergrande implosion. Recent large liquidity injections by the People’s Bank of China underscore the point.
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