In 2007, then-Chinese Prime Minister Wen Jiabao described the economy as “unstable, unbalanced, uncoordinated and unsustainable.” The Evergrande saga serves as a reminder to the world of the multiple vulnerabilities that still exist in the world’s second largest economy.
With the real estate company faltering, the crucial question is whether these weaknesses will lead to the collapse of the economy? The risks have undoubtedly increased and not only the slowdown in the economy but permanently slow growth, but there are also options that, if used skillfully, will avoid a crisis.
Real estate, which contributes about 29% of GDP, is over-built to the point that unsold apartments can accommodate at least 90 million Prime Time Zone. For local governments, which in turn are less able to invest in infrastructure, and thus, a collapse in the real estate sector would disrupt the engine that has driven Chinese growth for at least two decades, however, this chain reaction does not have to lead to economic collapse.
There is a path, but not an easy one, that can lead China through a multi-year transition toward a more sustainable growth model, and the most obvious flaw that must be addressed is China’s staggeringly high gross savings rate of 45.7% at the end of last year, more than double the rates in the United States. United States or Britain.
Much of the savings come from higher corporate profits that are a mirror image of pent-up wages, and if Beijing raises those wages, consumer spending will respond, helping to reorient the economy away from its excessive reliance on capital investment.
Another reason for high savings is the imperfect social security net. Completing the social security system can support the economy. China also has options in the industrial sector that it can use to compensate for its faltering real estate sector, and both high-tech manufacturing and green technologies are promising.
Wind and solar power were subsidized industries until recently, but are now efficient enough to outperform many thermal installations, and China appears to be largely on track to surpass the target of 1,200 gigawatts of wind and solar capacity by 2030, and to prevent a massive real estate sector. In order to avoid provoking a crisis, Beijing will need an approach that mixes maintaining demand with massive restructuring and a debt-settlement program.
It can at least achieve a measure of the former by re-zoning what is classified as a “rural” economy – where real estate is not tradable – as urban, which could open a huge source of latent demand, and in terms of restructuring and settlement, the fate of “Evergrand” itself in the coming months about the way forward.
Each of these transformations is complex, and nothing will be easy to achieve in an environment in which growth, which averaged 7.68% between 2010 and 2019, is expected to decline dramatically.
But if China’s executive prowess of the past four decades provides any clue, Beijing may be on par with the challenge, and that risk may not be the greatest economically of all. Xi Jinping, China’s ruler, presides over a system in which honest debate with The proliferation of personality cults, and if sycophantic fanaticism is allowed to crowd the mind, and arrogance is allowed to bypass calls for restraint, Beijing could undermine the credibility that will be critical to the success of any transition.
Xi operates in a completely different environment than previous generations of revolutionary leaders.
And if misguided attempts to fix the property bubble slow future growth, Beijing risks not only fleeing investors, but also losing the support of its residents.
By: Financial Times Editorial
The Financial Times article: The “Evergrand” crisis puts Beijing at a crossroads, which was written in Al Borsa newspaper.