In a broadcast of the economist panel of BNR Nieuwsradio, Professor of Public Economics at Erasmus School of Economics Bas Jacobs discusses the problems regarding Chinese real estate company Evergrande.
300 billion dollars in debt: Chinese real estate company Evergrande is in a great deal of trouble. This became known because the Chinese government obliged real estate companies to publicize their debt in order to confine the price of real estate projects. For a long time, the strategy of Evergrande has been to borrow huge sums of money from state banks to finance its operations. By this time, the company seems to be incapable of repaying its debt. Some people have called Evergrande ‘the Chinese Lehman Brothers’.
A true dilemma
However, Jacobs points to the differences between these two situations. The analogy seems to be wrong, since the interconnectedness between business and the government is a lot higher in China in comparison with the United States. At this moment, the Chinese government is contemplating how the issue can be resolved without having the middle-class feel the pain of absorbing the shock. This is extremely important to the administration, since it is anticipating an emerging middle-class that has to be aware of the economic progress. The government is facing a dilemma: how can this be achieved without signaling to businesses and banks that even acquiring huge amounts of debt isn’t crossing a line? One thing seems to be quite sure: the government will intervene to limit the damage done to the economy and the trust of its people.
The risk of a domino effect
According to Jacobs, Evergrande is in itself not big enough to cause big problems for the Chinese economy. However, the situation is different when it turns out that there are other real estate companies that have toxic loans outstanding. This complicates the situation, since it cannot be ruled out that the system has financed dangerous projects. Moreover, forecasting is even more difficult since the information from China often turns out to be unclear. There seems to be a deeper matter going on; the government holds on to the goal of attaining an increase in GDP of 6 percent per year. Jacobs stresses that this simply won’t be possible in the long run. ‘After the convergence, if China approaches the developed world, the developmental growth will be at its end. This means that economic growth cannot go faster than technological advancements which lead to an increase in productivity’.