Evergrande leaves China’s economy at a turning point

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In 2007, China’s then premier Wen Jiabao called the economy “unstable, unbalanced, uncoordinated and unsustainable”. The Evergrande saga has been a reminder to the world of the manifold frailties that still run through the world’s second-largest economy. As the property company stumbles, the crucial question is whether those frailties will drag down the economy. The risks have undoubtedly increased, not just of a slowdown but of permanently slower growth. But there are also options that, if skilfully used, would avert a crisis.

Real estate, which contributes about 29 per cent of gross domestic product, is so overbuilt that unsold apartments could accommodate at least 90m people. As developer sales slump, they have less money to buy land, thus squeezing the finances of local governments, which, in turn, are less able to invest in infrastructure. A property rout, therefore, would disable an engine that has propelled Chinese growth for at least two decades.

Yet such a chain reaction need not touch off an economic collapse. There is a path, though not an easy one, that could carry China through a multiyear transition towards a more sustainable growth model.

The most obvious imbalance to tackle is China’s staggeringly high gross savings rate — 45.7 per cent at the end of last year, more than double US or UK rates. Much of the savings come from high corporate profits that are the mirror image of repressed wages. If Beijing was to engineer a rise in those wages, consumer spending would respond, helping to reorientate the economy away from its over-reliance on capital investments. Another reason for high savings is an imperfect social security net; completing the social security system could also shore up the economy.

China has options, too, for industries it could fire up to compensate for a flagging property sector. High-tech manufacturing and green technologies are both promising. Wind and solar power were until recently subsidised industries, but are now efficient enough to outcompete many thermal installations. China appears on track vastly to exceed a target of 1,200GW of wind and solar generating capacity by 2030.

To prevent its huge property sector from triggering a crisis, Beijing will need an approach that mixes maintenance of demand with a massive restructuring and debt resolution programme. It could achieve at least a measure of the former by rezoning areas of what is classified as the “rural” economy — where property is not tradable — as urban. This could unlock a huge source of latent demand. As for restructuring and resolution, the fate of Evergrande itself in coming months may reveal the way forward.

Each of these transitions is complex. None will be easy to achieve in an environment in which growth, which averaged 7.68 per cent between 2010 and 2019, is forecast to slide significantly. But if China’s executive prowess in the past four decades provides any guide, Beijing may be equal to the challenge.

The biggest danger may not be economic at all. Xi Jinping, China’s ruler, presides over a regime in which honest debate is clearly receding as the trappings of a personality cult proliferate. If sycophantic zealotry is allowed to crowd out reason, and hubris to eclipse calls for restraint, then Beijing could undermine the credibility that will be crucial to the success of any transition. Xi is working in a very different environment from previous generations of revolutionary leaders. If mishandled attempts to fix the property bubble lead to slower future growth, Beijing risks not just investor flight, but losing the support of its population.


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