For years we have been insisting that the growth of public and private debt in China is unsustainable, to the point that the government’s measures to curb it are not enough. It even gives the impression that China cannot cope with its indebtedness by relying on its own forces and is looking for help in other markets, such as Wall Street, despite the US economic sanctions.
China’s real estate companies are as bankrupt as its banks, which is why a vulture fund like Blackrock has come to the rescue, setting up in China, perhaps on the smell of carrion, like the corpse of Evergrande, and bypassing the embargo.
Evergrande is just the tip of an iceberg of many giant, heavily indebted Chinese companies in which, apart from the state, only a vulture fund is willing to invest. So far the Chinese Central Bank has not intervened and past experiences are not good. The Beijing government also created a “bad bank” to plug the holes of the good banks, Huarong, and it backfired. The rescuer had to be cut back in August.
Huarong is one of four state-owned enterprises set up in the wake of the 1998 Asian financial crisis to manage the assets of failed companies. Although it is majority state-owned, since 2014 it has sold shares to foreign capital, indicating that the Chinese central bank was not capable of achieving the bailout on its own.
Huarong’s debt was just over $200bn; Evergrande’s is almost $300bn. China’s financial crisis “is snowballing”, writes F. William Engdahl, and the financial crisis has been joined by the real estate crisis, a bubble that may leave tens of thousands of homeowners who have taken on debt or paid for their homes before they were built homeless.
It is therefore an economic and political crisis that the government is late to address. “Housing is for living, not speculation,” Xi Jinping has said. Real estate construction and sales account for more than 28 per cent of China’s GDP, according to official estimates. If the Chinese government bursts the housing bubble, debts will remain unpaid. Many companies will go bankrupt and in their fall will drag others down.
The Chinese Central Bank was able to digest the bankruptcy of Huarong and can also digest that of Evergrande, i.e. it can continue to fight the symptoms, but the disease will continue and get worse and worse. Surgery is needed, but it is difficult to know where to start cutting off the tap. It seems that the bailouts are over. The New Silk Road has already cut its budgets and major construction projects are going to do the same, both centrally and locally.
China has to start selling to make cash and that is why Blackrock has appeared, to be followed by other vulture funds after juicy morsels, such as the gigantic high-speed rail network, the largest in the world. There are many such pearls.