Beyond the setbacks of Evergrande, a slow-moving Chinese economy

Global markets have anxiously watched a huge, heavily indebted Chinese real estate company flirt with default, fearing a collapse could spill over to the international financial system. China Evergrande Group, the developer, said on Wednesday it had reached a deal that could give it some breathing space from paying off a bond due Thursday. But this murky arrangement does not respond to the broader threat to Beijing’s key leaders and the global economic outlook: China’s growth is slowing and the government may need to redouble its efforts to rekindle it.

Retail sales were much weaker than expected last month in China, due to the slowdown in car sales. Industrial production slowed down, especially for large freight trucks. And developers slashed new housing projects sharply over the summer, while rushing to complete projects they had already started.

Heavy government spending on new rail lines, highways and other projects is keeping the economy afloat right now, but may not be sustainable next year. Markets were mesmerized by the idea that Evergrande could be China’s ‘Lehman moment’, a reference to the collapse of investment bank Lehman Bros. in 2008, which sparked the global financial crisis. While many economists in China cast cold water on the idea of ​​potential financial contagion, they point to the general weakness of the Chinese real estate market, a mainstay of the economy, and other long-term threats.

“It’s not a Lehman moment. It’s too sensational, ”said Xu Sitao, an economist in Deloitte’s Beijing office. “The question is next year.” With Evergrande, it’s not entirely clear what will happen on Thursday when the bond interest payments are due. On Wednesday, he said in a loosely worded stock document that he had reached a deal with Chinese investors to make a payment due the next day, without providing details.

He did not mention a payment of $ 83.5 million (€ 71 million) due Thursday to foreign bondholders. Bloomberg News, citing bond documents, said the company has a 30-day grace period before a missed payment becomes a default. Evergrande did not respond to questions.

To intervene

Chinese policymakers could eventually step in and save Evergrande. But that would run counter to their efforts to get companies to borrow less and slow down the real estate market, where apartments for purchase are increasingly unaffordable for many Chinese families in a number of markets.

People familiar with China’s economic policy making say that large corporations often have a lot of collateral on their books, so officials believe lenders won’t be burnt out in a collapse. They also cite the tools Beijing has to gradually deleverage and limit financial disruption, such as its control of the banking system.

Letting Evergrande collapse quickly, on the other hand, risks a large fall in apartment prices or other potentially unpredictable shocks to the financial system. Chinese authorities have taken short-term measures to boost confidence. The central bank said on Wednesday morning that it had temporarily injected around $ 18.6 billion into credit markets, as part of a broader effort in recent days to ensure abundant liquidity is available.

Students at Evergrande Football School, Qingyuan, Guangdong, China, in December 2016. Real estate developer Evergrande has already got into debt, but now the music has stopped. Photography: Gilles Sabrie / The New York Times

Real estate sales were slowing even before the latest hardships, in part due to Beijing’s cooling efforts, depriving Evergrande and other real estate developers of the money they needed to complete other projects. Sales fell 7.1 percent in value in July from the previous year and 18.7 percent in August from the same month last year.

Overcapacity in many industrial sectors, coupled with a failing construction sector, has prompted economists to predict slower growth. Bank of America on Tuesday lowered its forecast for China’s economic growth for next year to 5.3% from a previous forecast of 6.2%.

Growth of over 5 percent is still strong by most standards. But that would represent a much weaker performance than this year, which many economists forecast a total of 8% or more. It would be considerably slower than the official growth rates that China has posted in recent years.

Hovering questions

Other issues currently looming over the Chinese economy can be seen in a handful of measures that might at first glance seem like little to do with the real estate sector, bond prices or the unfinished 1.6 million apartments of Evergrande. The measures assess the production and sale of heavy freight trucks.

Construction companies and manufacturers around the world tend to stop buying big trucks when they see problems coming up. Alan Greenspan, the former chairman of the Federal Reserve, cited the strength of the freight truck manufacturing industry as one of his favorite predictors of the future health of the US economy.

The China Association of Automobile Manufacturers revealed earlier this month that the production and sales of heavy trucks fell by almost half in August compared to the same month last year. Excluding statistical quirks caused by the Lunar New Year holiday schedule, this was the worst performance for both heavyweight indicators since spring 2015, when China struggled to come out of a botched currency devaluation. .

However, the fall in production and sales of freight trucks is more than a loss of economic confidence. It also shows how China’s policies in recent years have temporarily inflated demand and produced severe overcapacity. Strict new air pollution standards have come into effect for freight trucks manufactured from July 1. Stricter safety standards are also gradually being put in place, such as the requirement that on-board software and sensors warn drivers when they start to exit their lanes.

Domestic truck makers expanded their factories last year to build as many trucks as they could before the stricter rules came into effect. China’s freight truck manufacturing capacity has soared to 1.6 million trucks per year in a market where long-term sales estimates are well below 1 million trucks per year. Truck dealerships across China are now crowded with rows of unsold trucks.

Consumer spending

Car sales were also weak last month, adding to uncertainty over whether consumer spending will remain strong in China even as Evergrande struggles. After construction and government spending, the auto industry is one of the most important sectors of the Chinese economy, playing a role almost three times larger than exports to the United States.

A severe shortage of computer chips has separately affected the production and sale of cars in China, confusing the picture. “The car sales market is generally down, in part due to the shortage of chips,” said Cui Dongshu, general secretary of the China Passenger Car Association, a Beijing-based industry trade group.

As China faces large overcapacity and other concerns, many economists in China still express more confidence than economists elsewhere that the country can overcome its problems. Economists in China note that the Chinese government has more capacity than most to set interest rates and control large movements of money inside and outside the country.

“China,” said Xu, of Deloitte, “still has a lot of tools.” – This article originally appeared inThe New York Times


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