boards

“Everyone can feel that a profound change is taking place,” he
stated, proclaiming an end to China’s love affair with Western culture and
“return to the essence of socialism”. It was framed as a fight to the
death with the West, the unvarnished Xi doctrine.
The showdown has exposed China’s Achilles’ heel: its reliance on imported
hi-tech components and chips, the fuel of the digital economy.
The other catalytic shock has been this year’s census, revealing that the
country is ageing even faster than feared. The fertility has kept falling to
1.3 per cent despite the end of the one-child policy, now the three-child
policy.
The Party has concluded that the house price spiral is triply corrosive: it
is a financial black hole; it is the chief cause of cancerous inequality;
and it is a strategic threat through the demographic channel.

E-house
China Research says the ratio of prices to average incomes in Shenzhen has
reached 43.5. Top party officials have been sacked for allowing this to
happen. Local government bosses everywhere now know that they will be
punished for property booms and rewarded for austerity.
The plan is to offset the attack on property and other sectors of capitalist
sin with “universal easing” to bolster the rest of the economy. The State
Council last month ordered the People’s Bank to cut the reserve
requirement ratio for lenders in a pre-emptive move.

This cannot stop
a slowdown. Construction is the chief instrument of cyclical management. No
other sector is big enough to compensate, nor able to transmit the credit
impulse.
The immediate danger is what happens to Chinese developers with $US5.1
trillion ($6.9 trillion) debt between them, many relying on sales of unbuilt
property to roll over existing liabilities.
China’s developers have amassed $US5.1 trillion in debt between them, with
many relying on sales of unbuilt property to roll over existing liabilities.
Hedge fund veteran George Soros this week floated the possibility of a
systemic financial crash and an educational reckoning for tourist investors
from the West. But I find it hard to imagine a Lehmanesque “Minsky”
meltdown in a system where the state retains iron control over banks.
The authorities are already orchestrating a disguised soft-landing for
indebted developer Evergrande. “They cannot afford to let it go bust so
they are kicking the can down the road,” said George Magnus from Oxford
University’s China Centre.
“The Party craves two things above all: control, and stability. If the
property market falters, the consequences for the Chinese economy will be
savage. They will not want to take that risk before next year’s Party
Congress,” he said. The forum is supposed to be the ultimate coronation of
“helmsman” Xi.
Yet that does not preclude a slow-motion deterioration that ends illusions
of Chinese economic exceptionalism and that is large enough to throw the
world’s post-pandemic recovery into doubt. The unfolding drama dwarfs the
relatively trivial question of when the Fed will tweak its bond purchases,
and by how much.
The COVID boom has been perversely lucrative for the owners of capital in
rich economies. But the easy money is exhausted and political risk is rising
. We are moving into treacherous global waters.