Opinion | Xi Jinping Sails China’s Economy Into a Shoal

Chinese President Xi Jinping


Huang Jingwen/Zuma Press

Maybe China has to follow the usual economic rules after all. After many years pursuing an economic strategy dependent on a real-estate boom, Beijing is discovering it’s no easier to unwind those excesses in a state-dominated economy than it would be anywhere else.

This great real-estate unwind enters a new phase this week as Evergrande Group, the country’s most indebted property developer, appears set to tip into insolvency at last. The company struggled for months to fend off the wolves and disclosed Friday it owes $260 million on a credit guarantee it may not be able to pay. It was on the verge of defaulting on an $82.5 million bond interest payment as we went to press Monday.

In typical Communist Party fashion, the unwinding may have started already without a formal announcement. Government officials from Guangdong province appear to have set up shop in the company’s headquarters, and Beijing over the weekend released extra liquidity into the banking system, presumably to stave off financial instability in the event of a default. Attention is also on other property firms such as Kaisa, which is negotiating with creditors to avoid defaulting on a $400 million bond due to mature Tuesday.

Everyone, including Beijing, expected this to be messy. President

Xi Jinping

intended some upheaval when he introduced stricter borrowing limits on developers last year. To the extent state-owned developers may be waiting to absorb assets from distressed private competitors, the turmoil also advances Mr. Xi’s goal to consolidate economic control in the state.

What’s catching many by surprise, but shouldn’t have, is how quickly these shocks are radiating outward. The precipitous decline in property sales by developers—down about 38% year-on-year in November for the top 100 companies—may be much steeper than Beijing intended. One explanation is that in a system that relies as heavily on moral suasion as on explicit regulation, banks may have applied last year’s credit restrictions too zealously.

The longer this property decline persists, the more stress it will place on local governments that fund themselves via land auctions. These auctions are conducted three times a year and, of the 700 plots put on the block in September in cities across the country, about a third were withdrawn for lack of interest, the South China Morning Post reported.

This is starting to weigh on the broader economy. Recent surveys of managers point to fears of a contraction in manufacturing and softening optimism in services. The economy grew only 4.9% year-on-year in the third quarter.

This can be explained only partly by Beijing’s erratic, draconian and implausible zero-Covid strategy of travel restrictions and wildcat lockdowns. Credit woes linked to property are likely filtering through China’s financial gray market. For instance, property firms’ suppliers will grapple with how to value their accounts receivable, which often are traded among smaller companies in lieu of cash or normal credit.

No wonder Beijing is getting cold feet. Officials in October started nudging banks to apply credit restrictions less scrupulously. Local governments may bend the rules to allow cash-strapped developers to continue buying land. Mr. Xi also can lean on state-owned developers to stabilize the market by buying land and taking over projects abandoned by insolvent private companies.

But this bubble-popping may be progressing beyond the point where Beijing can easily control it. Although it remains the case that China’s relatively closed financial system is likely to keep developer defaults from blooming into a global financial crisis, the slowdown in China’s real economy points to risks for China’s trading partners. No one should relish the thought of a Chinese property collapse, but no one should be fully confident Mr. Xi can avert one.

Main Street (06/28/21): If Joe Biden intends to outcompete Beijing, surely Milton Friedman still offers a more compelling model than simply copying the government-directed approach of Xi Jinping. Images: AP/Getty Images Composite: Mark Kelly

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