Observations of an Expat: Not So Evergrande

Uncertainty – political and economic – is the buzzword doing the rounds as the world faces the imminent collapse of Chinese property giant Evergrande.

And the market – in fact everyone – hates uncertainty.

No one knows how the secretive Communist Party leader Xi Jinping will react. Will he take the view that Evergrande is too big to fail or too big to save?

What will be the reaction of the millions of Chinese who are set to lose the money they gave to Evergrande and Country Garden (the other Chinese property company on the brink of collapse) for unfinished homes?

Will the problem of Chinese homelessness, high youth unemployment (currently running at 21.3 percent) and slow recovery from Covid create social unrest? And if it does, past performance indicates that Xi would respond with increased repression.

Can the ruling Chinese Communist Party escape the political consequences of its high-growth policies by shifting blame onto the shoulders of the companies’ management?

Evergrande’s debts total $300 billion. Country Garden’s liabilities are estimated at another $100 billion. Between them they directly employ more than 250,000 workers. Indirectly, millions of jobs will be impacted in industries servicing the property market.

Millions more will be affected by the credit crunch that will inevitably follow as exposed banks either go to the wall or are forced to cut lending to survive.  Less money in the system means less for the growing Chinese middle classes to spend. This will hit Western companies reliant on the Chinese market such as Volkswagen, General Motors, Dyson, Burberry, Chanel, McDonalds, KFC, Apple, Target, Walmart and many others. And the banks that loaned them money to expand into the Chinese market will be hit.

The inevitable contraction in the Chinese economy will mean fewer Yuan to spend on imports.  As most Chinese exports are manufactured products, this will probably benefit manufacturing industries in the West but damage the major commodity producers such as Australia, Latin America, Brazil, Africa, American farmers and the oil-producing countries.

As usual, the poorest countries will be hit the hardest. Chinese banks have become a major source of loan capital for large swathes of Africa, Southeast Asia and Latin America. Several countries have already defaulted, are on the brink or in the middle of major restructuring negotiations with Chinese banks who will now have less money to accommodate them.

A major default by developing countries opens the possibility of increased unrest in those countries and the possibility of a boost in economic migrants to developed countries. This in turn creates another set of political problems.

Chinese economic problems could also have major foreign policy implications. Beijing could conclude that it needs American and European help to dig itself out of the Evergrande hole. In which case they may be more accommodating on issues such as Ukraine, the South China Sea and Taiwan. On the other hand, the regime may attempt to distract Chinese from their domestic problems by creating foreign crises.

The only thing that is certain is that the clouds of uncertainty are gathering over China.

* Tom Arms is foreign editor of Liberal Democrat Voice and author of “The Encyclopaedia of the Cold War” and “America Made in Britain". To subscribe to his email alerts on world affairs click here.

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  • China is reportedly refusing to participate in a deal to restructure Sri Lanka’s debt Sri Lanka shows how broken debt negotiations have become
    By refusing to take a haircut on its debts, China is holding up Sri Lanka’s restructuring—as it is in other indebted countries, too.The refusal has stalled any progress with getting IMF aid and other International creditors (most notably India) have decided they have no choice but to freeze out China.
    “They may end up insisting that Sri Lanka suspends repayments to China or forces it onto a comparable deal. Either would be almost impossible to enforce. Creditors usually only agree to something because everyone agrees to the same terms. Even creditors at war with one another usually manage to hash out a deal. The decision to proceed without China reveals the extent of the breakdown in sovereign-debt negotiations”.

  • I would be very surprised if Beijing concludes that it needs American and European help to dig itself out of the Evergrande hole.
    China’s belt and road initiative has involved constructing a so called “String of Pearls” around India. String of Pearls is a strategic encirclement strategy by the Chinese to encircle India by building military infrastructure along the key points (pearls) in the Indian Ocean to put pressure on New Delhi, check its military dominance in the Indian ocean which it considers as its backyard and to possibly ward off a chokehold of the strategic Malacca Strait which accounts for almost 90% of the Chinese overseas trade. The ‘String of Pearls’ strategy has involved the establishment of maritime bases in Sri Lanka, the Maldives, Pakistan, Bangladesh and Djibouti.
    India has begun to responded by emulating China’s provision of infrastructure finance or so called ‘Debt Traps’ to resource rich countries in strategic locations important to the Republic of India. India has been creating a “Necklace of Diamonds”.
    The ‘Necklace’ comprises Changi Naval Base in Singapore, Chabahar Port in Iran, assumption Islands in Seychelles. Sabang port in Indonesia and Duqm Port in Oman.
    India wants to take over from China as the world’s manufacturing workshop. With a much younger population and widespread English language fluency, it could well do so.

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