Exclusive interview for Wall Street Italia with Giuliano Noci, Prorector of Milan Polytechnic for China. Edited by Leopoldo Gasbarro.
“A sustained storm, somehow the knots are coming home to settle“. Following Evergrande’s debt restructuring, Giuliano Noci, Prorector of Milan Polytechnic for China said: The dragon’s economic situation is not the bestalso because of its internal problems and mistakes in the past.
Interview with our director, Leopold Gasbarrohas carefully analyzed all the implications that could affect the Dragon’s economy, as well as the national and international financial markets.
The origins of today’s real estate crisis
The latest facts on Evergrande’s economic situation certainly don’t start today and especially they are not the result of a random event.
According to Professor Noci, everything could be traced back to the $560 billion maneuver Launched by the Chinese government in 2008 to boost the economy: “A monstrous maneuver that was the cause of some of today’s distortions. In fact, it sparked growth based on infrastructure investments that were underproductive and indebted“. From then on, China’s debt began to increase, reached over 300% of GDP.
A situation that, according to Prof., can be explained. Walnuts from three basic aspects. The first point It’s about the backwardness and closure of the Chinese financial system. “The Chinese had real estate as their main asset class. For the Chinese, it was almost an eternity that ensured steady growth over the years. The Chinese have put their savings into leveraged real estate“Real estate accounted for 30% of China’s GDP.
The second point is the fact of having a hyper-capitalist system, but within a socialist economy. what implies”paid treatment. There is no pension system comparable to the western one. And all the migrants moving around the city – and there are 300 million – do not have the rights that residents have earned. An example? Education and health benefits are paid for in premium form“. All of this has done nothing but create a system that is not prone to consumption but very prone to saving for services.
The third point is the Chinese Communist Party’s decision to investas Xi Jinping said: “The house is for living in, not for speculating“. With this deadlock, a frightening real estate cycle emerged. “And the banks were no longer able to support the heavily indebted real estate companies. The fact that 40% of companies have gone bankrupt will have an impact on investing companies and households.”
Not only inside, but also outside, with the trade and technology war with the US. We are facing “a loss of image compared to Western countries, followed by their mutual isolation from China. Ultimately, this means a drop in exports“.
In short, all critical issues that pose a risk devours the Chinese economic engine.
Evergrande, insolvency or bankruptcy
Evergrandes is not a real failure, but a debt restructuring. “In New York, Evergrande called for debt restructuring. But the situation stands at 350 billion debt, which, given the picture and demand profile that seems to be emerging in the Chinese context, only leads to one overriding urgency: taking action to restructure China’s real estate debt“.
The decision to take a more prudent action like that of former Chapter 15 of the US bankruptcy code is likely one geopolitical move by the Chinese Communist Party. “It cannot be ruled out that it was imposed to prevent some American stakeholders from filing for Chapter 11 for official bankruptcy“.
But bankruptcy requires another, according to Noci direct intervention by the party. “Evergrande is officially not a state company, but a system company with far-reaching effects. 350 billion debt, that’s about 15% of Italy’s GDP“. Many other companies have already shown signs of slowing down, most notably Country Garden. Or the Zhongrong Trust, which was struggling to repay its bond installments. And that’s it a shadow benchone of the many on display, “[…] an estimated $3 trillion in real estate and corporate credit without any regulation“. An unmanageable risk if you include the asset classes in the USA and Beijing.
Is China facing a Lehman Brothers moment?
The Comparison with the western crisis of 2008 Does it have any basis? “It’s a moment of discontinuity. But it doesn’t compare to 2008. This is because the internal system, as a socialist and centralized economy, has different scope for intervention than the American and Western ones. But there will certainly be a discontinuity. The helm is in Beijing’s hands: if it goes in the right direction, we’re on the road to recovery. Otherwise new weaknesses will arise. The geopolitical reflex will come with it. A weak China needs external enemies“.
Given the current real estate crisis, However, China has options for action. Like Prof. Crazy”I expect that the introduction of a stimulus package will be delegated to the Prime Minister in the hopes of a debt restructuring and some fundamental reforms“. For example, those about the rights of the 300 million Yunko, rural people who work in the city and whose rights are at risk. “According to studies, giving these people equal rights would increase domestic demand by 20%“. Otherwise there would only be other stimulus measures for classic useless investments. So more fuel on fire.