China Walks Nervous Path Between Two Threats By


By Geoffrey Smith — It may be easy to lose sight of this, but whether the number of Russian soldiers permanently ending up in Ukraine is zero, or 100,000, or anywhere in between, the big risk for the global economy this year remains China.

The world’s second-largest economy must choose a difficult path between the dual risk of Covid-19 and a slow-motion housing crisis: cushioning the economy with lockdowns on the one hand, while supporting it with looser monetary and prudential policy on the one hand. somewhere else. other.

A seems inevitable. As Western governments withdraw their stimulus measures and reopen their economies, the dramatic shift in global demand since 2020 towards manufactured goods (mostly made in China) will reverse. The country recorded export growth of 29.9% last year, generating a new record trade surplus. It’s not sustainable.

China needs global customers to relieve its manufacturing sector, not least because its zero Covid-19 tolerance leaves dangerously little leeway in the global supply chains it powers. The number of reported cases is now down and the much publicized lockdown in the city of Xi’an has now been lifted, but Omicron is so contagious that the upcoming Lunar New Year celebrations still carry a clear risk of spreading it more widely to across the country. .

At the same time, the real estate sector, which has been the other big driver of economic growth in recent years, is also slowing down. While authorities have been successful in avoiding disorderly failures in the sector, they have been less successful in creating the kind of conditions needed to ensure that fundamentally sound companies can always find credit. At 11.6%, outstanding loans to the economy grew at their lowest annual rate for 20 years.

Markets cheered in December when a committee dominated by public institutions took control of debt restructuring talks at Evergrande, the country’s largest and most indebted developer, believing that clear political direction would speed up cleaning and quickly bring clarity to the area.

However, this did not happen. Evergrande’s international creditors said last week they would begin enforcing their rights against the company after being ignored by the company for weeks, complaining of a “lack of commitment and opaque decision-making…contrary to well-established international standards in restructuring processes of this magnitude”. .”

A public letter from creditors suggests they will have little left after politically well-connected Evergrande people cut the juiciest bits of the carcass. “Only a few days go by without another news report or regulatory announcement yet disclosing previously undisclosed liabilities, promises, sales and disposals of assets and/or government appropriations,” they said. declared the creditors.

No wonder international bond markets remain closed to Chinese sponsors. Lack of refinancing alternatives generates steady decline in default notices – Hong Kong-listed Yuzhou Properties (HK:) is the latest to say it won’t meet its obligations.

The authorities are at least trying to compensate by easing domestic financing conditions. The People’s Bank of China over the past week and has raised the possibility of doing more. It has the leeway to do so because inflation is falling, both for consumers and manufacturers (unlike western economies). The yuan, meanwhile, is in poor health, hitting its highest level in nearly four years.

Chinese markets could remain susceptible to other shocks, such as regulators’ campaign against the country’s biggest internet companies last year. But authorities have managed to avert disaster, both with the pandemic and its property developers, in a way that many Western countries have failed. For companies and investors in Europe and the United States who depend on maintaining this stability, this is good news.

Daniel K. Denny