Worsening problems in the Chinese economy
The major economic and financial woes in China’s real estate development industry continue to worsen with the announcement this week by Fantasia Holdings that it had failed to make a bond payment.
Just a few weeks ago, Fantasia assured that she had “no liquidity problem”, but announced Monday “that she had not made the payment” of a bond of 206 million dollars.
Last month, Evergrande, the most leveraged real estate developer, missed a payment on a dollar-denominated bond, triggering a 30-day grace period before a default was declared.
The question in Asian markets is to what extent the financial crisis will spread to other real estate developers, who represent a large part of the high yield bond or junk bond market.
Dickie Wong, head of research at Hong-based Kingston Securities, told the Financial Time: “There is nothing that investors can do… the worst is yet to come. “
Rating agency Fitch said Fantasia had $ 1.9 billion in offshore bond payments by the end of next year as well as 6.4 billion renminbi ($ 992 billion) in offshore bond payments. ‘onshore bonds due during the same period.
The crisis goes far beyond real estate given the crucial role it has played in the 13 years since the 2008 global financial crisis, when the Chinese government increasingly turned to development. real estate as a central engine of economic growth.
Financial Time columnist Martin Wolf wrote yesterday that the most serious problem in the aftermath of the crisis was that the economy’s dependence on demand for real estate investment had to end. “This will impose a huge adjustment and create a big headache for the authorities: what to replace real estate investment with to create demand? he wrote.
Wolf cited statistics indicating that long before the Evergrande crisis, China’s growth model, based on high levels of investment, was running out of steam. Total fixed investment averaged around 43% of gross domestic product (GDP) between 2010 and 2019, five percentage points more than between 2000 and 2019. The overall economy is affected.
At the same time, the debt has increased. Household debt increased from 29% of GDP in 2010 to 61% in 2021, while debt of the non-financial corporate sector increased from 118% to 159% of GDP during the same period.
Wolf cited the conclusion of a 2020 article by economists Kenneth Rogoff and Yuanchen Yang that, when its spillover effects are taken into account, the Chinese real estate sector accounted for 29% of GDP in 2016.
He claimed that because the government controlled the Chinese financial system, a financial crisis could be avoided, a position advanced by many others. But this supposition has not yet been verified by the events currently unfolding.
The major impact, he said, was that real estate investment would collapse and that would have a “significant negative effect on the finances of local communities”. The taxation powers of local governments are limited and depend on the flow of income from land sales to finance infrastructure projects.
According to research by Rogoff and Yang, cited in the article, “a 20% drop in real estate activity could lead to a 5-10% drop in GDP, even without the amplification of a banking crisis, or without consider the importance of real estate. succession as collateral. And, according to Wolf, “it could be worse.”
He hinted that growth could continue if there was an abandonment of unnecessary investments and increased consumer spending resulting from a redistribution of income to the poorest households. This would require “big reforms” combined with abandonment of ownership and a transition to high carbon emissions, also requiring “big policy changes”.
The model based on unnecessary investments had reached its end and had to be replaced, he concluded.
But this fact has long been recognized by the Chinese regime and was the basis for the launch in 2015 of the Made in China 2025 plan, which spells out the need to develop high-tech industries.
However, it encountered a major obstacle: the dominance of US imperialism over the world economy exerted by its design of vital computer chips and the preeminent position of the dollar in the international financial system.
The United States is determined to crush China’s high-tech development by any means necessary, as it is seen as both an economic and a military threat.
This policy, initiated under Trump, pursued and deepened by the Biden administration, is most clearly illustrated by the US actions against the Chinese high-tech telecommunications company Huawei, seen by the Xi Jinping regime as an essential part of the next one. stage of economic development. .
Three years ago, Huawei, which had invested heavily in the development of communications technology, was poised to become the world’s leading developer of 5G global telephone infrastructure.
Last month, Huawei Chairman Eric Xu said the company’s revenue from the sale of smartphones would fall by $ 30 billion to $ 40 billion this year from $ 136.7 billion in sales in 2020, with no prospect of getting that money back over the next few years. Earlier, Xu had said that the company’s goal was simply to survive.
The destruction of its smartphone business is visible in the fact that, despite significant advances in the development of 5G infrastructure – many patents are held by Huawei – its latest smartphone will only be 4G.
The actions of US imperialism towards Huawei are emblematic of its stance towards Chinese economic development as a whole – its reduction to what amounts to the status of an economic semi-colony.
At a time when Chinese growth depended on the export of cheap consumer goods and low-tech industrial components, it was seen by the United States as a “strategic partner” summed up in the invention of the term Chimerica by economic historian and media commentator. Niall Ferguson.
China is now a “strategic competitor”. The methods employed by the United States against Huawei are a form of 21st century imperialist gangsterism. The telephone company has been excluded from the development of telecommunications networks on the spurious grounds that it is a threat to “security”.
The American companies that supplied him with computer chips are now banned from doing so. The ban has been extended to companies in other countries threatening them to cut their own supplies from US companies if they continue to sell components to Huawei. And there’s the ever-present threat that companies that defy US guidelines will be shut out of the global financial system because of the dollar’s preeminence.
With US companies banned from doing business with Huawei, Google has stopped offering services like Gmail and YouTube to its phones. From a position where it was once the world’s largest smartphone supplier, Huawei has now moved out of the top five.
The collapse of the old model of Chinese economic progress, based to a large extent on real estate development, and the barriers erected by US imperialism to a model based on the development of high technology contain the potential for a crisis. major economic.
The prospect of a so-called “socialism with Chinese characteristics” regime based on capitalism has turned out to be a pipe dream and the growing economic problems will lead to the eruption of social and political struggles of the Chinese working class of millions.