Is China riding the growth of an economic miracle that will lead to the rise of a dominating global superpower… or is the Chinese economy hyper-inflated, fueled by speculation and debt, that will lead to an inevitable collapse?
Perhaps it will be something in between.
Listeners of the FourStar Today’s Market Explained podcast know how China has employed significantly higher levels of debt financing in recent years to accelerate growth. With the continued industrialization of the Chinese economy, agrarian society has increasingly migrated into the cities for better pay- and all these new city dwellers need housing. Money has been funneled into massive construction projects, which are creating new cities across China.
As evidenced by the Evergrande debt crisis, it seems this excessive growth may have come to an end. Development projects across China have recently imploded and many cities are way overbuilt. Real estate accounts for about 30% of Chinese GDP; Evergrande is the second largest property developer in China, directly employing 200,000 people, with a rank of 122 in the Fortune Global 500. Evergrande is involved in over 1,300 projects in 280 cities across China, many unfinished, but as the most indebted developer in China, it can no longer meet debt payment obligations.
Look at it this way… as of the end of 2020, the total size of Evergrande projects currently under construction in China is about equal to 513 Empire State Buildings!
Unfortunately for the Chinese economy, Evergrande is not the only example of cash flow problems stemming from excessive debt, as Chinese corporate debt overall has steadily risen. In addition, both the Chinese national government and local governments have for years binged on debt to fuel growth and it is now becoming an issue. Some predict other debt dominoes will fall in China.
The Communist Party rulers of China have emphasized ‘market forces’ for years, but the lack of transparency in their actions is striking. All the while, they continue to suppress other key elements of capitalism and democracy- freedom, entrepreneurship, and human rights.
For a deeper dive, enjoy this very thoughtful piece by economist John Maudlin, who has a great handle on this issue. Let me know what you think!
~ Brian Kasal- The Leadership Matrix
Click here- Xi’s Changing Plan
As an added bonus: China’s Evergrande Debt Crisis: Sizing Up a Big Mess
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