China infected by financial capitalism
The weight of the real estate industry has now become significant in the Chinese economy. Whereas it made up 5% of GDP in 1995, it is now one of the country’s main growth drivers, coming to more than 30% of economic activity. It is more or less at the same level as the real estate markets in Spain and Ireland prior to the bubble bursting. At a time when the country’s interest rates were pushed extremely low over a long period and when liquidity was in abundance, investment in real estate quickly took what was essentially a speculative turn in China, without having any link to demand for housing or offices. It’s simple really: prices in the big cities rocketed up nearly sevenfold over 20 years while, in comparison, US real estate (as a national average) didn’t even double between 2000 and 2007, before the subprime crisis hit.
To shine a light on this frenzy, the example of Evergrande speaks volumes because the shares of what has been the biggest real estate business in China were subscribed 50 times when it was first listed on the stock market in 2009. On that day, its value went up by 34% in just one session. The bonds of the biggest private lender in China however are currently showing a 30% drop, with the company’s debts in 2021 reaching nearly 170% of its balance sheet, taken on in order to fund nearly 230 million square metres of real estate across the country. Just like with the subprimes in the US, all it needed was a spark – even just an ember – to ignite a run: the freezing of certain assets by local banks, and the refusal to give out mortgage loans to potential borrowers by banks based in Hong Kong.
As was the case throughout the communist nations, all real estate and land in China belongs to the government. The regulations were however relaxed in 1988, with long-term leases (up to 70 years) being permitted for residential and commercial real estate. The objective wasn’t social or philanthropic, as this subterfuge allowed the government to raise considerable funds that in turn greatly contributed to public investment in infrastructure. Ten years later, in 1998, the law forcing employers to provide housing to their employees was abolished because business leaders were not investing enough, in terms of both quantity and quality, in their country’s real estate. This paradigm shift created a hunger among China’s workforce who rushed to buy their housing back, aided of course by incredibly lucrative funding that in turn stimulated a frenzied phase of speculation.
This colossal transfer of wealth, from public enterprises owned by the government to private individuals and citizens in general of course raised the stakes, with the owners of goods being tempted to sell them on to turn a profit and to then reinvest more and better. The pinnacle had however not yet been reached since it was then that government-controlled companies as well as private ones discovered that it was much more profitable to spend time and money on the real estate market than on their original mission. We therefore have a better idea of the speculative heights that took hold of residential and commercial real estate in China due to the generous profit margins bestowed by almost the whole spectrum: private individuals, companies and even the public sector. This easily-attained growth granted by real estate, construction, and a terrifying use of credit and leverage, obviously, fundamentally, helped pave the way for a very deficient allocation of capital to a sterile domain that favoured hyper-speculation, like real estate, to the detriment of industrial and technological industries that – as for them – would have granted a stable and long-term growth.
I really don’t understand how the Evergrande run can still, today, avoid a liquidity crisis that risks spreading across the whole Chinese economy, where household consumption is already under threat. It is astonishing to see China become the latest victim to date of a degenerated capitalism that is, admittedly, profiting from human greed.