Evergrande collapse, deconstructive China

Liquidation of Evergrande by a Hong Kong court this week piles on the pressure for China to prop up its collapsing property market. Beijing will have to take a call on protecting foreign creditors when homebuyers have stopped purchases. Since real estate is key to the Chinese economy – where households park around three-fourths of their savings and foreign bond holders have pushed enormous credit to developers – some form of taxpayer-led rescue is inevitable. Question is, how long will the government hold out on stimulating the economy, a key component of which will need to address persisting house price deflation? China may have greater controls over contagion. But its equity markets are slumping as global manufacturing evaluates alternative production bases.

Getting homebuyers and taxpayers to underwrite losses of foreign creditors should be a stretch for Beijing, which has choreographed China’s rapid economic growth by funnelling household savings into infrastructure. Investment-led export growth has depressed domestic consumption and is now faltering as China’s trade surplus with the rest of the world slows. Reviving consumption becomes even more difficult with real estate denting household wealth. And, unless China rebalances demand between investment and consumption, it will struggle to grow even at its current diminutive rate compared to its high investment phase.

A cooling Chinese economy is not good news for the world – except in economies positioning themselves for export-led growth, such as India. These stand to benefit from rising foreign investment and an elongated commodity downcycle. Fragility of China’s recovery is, in some manner, inversely related to India’s economic momentum. But, for all the obvious gains, there are lessons to be drawn from the Chinese model that has tested the limits of export-led growth. Even before that, Japan’s housing market collapse triggered decades of recession. China still has the option to avert the eventuality. It would do itself and the world a favour by acting with dispatch.