GT Voice: external pressure will not affect the rate of deflation of Chinese bubbles


Evergrande group photo: CFP

As the Chinese company examines whether Chinese real estate giant Evergrande can weather a liquidity crunch through a wave of asset sales, some Westerners have already gone too far in hyperventilating on its ripple effects on the economy. global. But that won’t disrupt the pace at which China is addressing some of its potential systemic risks.

The latest example of such rhetoric is the remarks of US Secretary of State Antony Blinken, who urged China to act “responsibly” when it comes to dealing with the potential impacts of the liquidity crisis in China. ‘Evergrande, Bloomberg reported on Wednesday. “China has to make sovereign economic decisions for itself, but we also know that what China does economically is going to have deep ramifications, profound effects, literally on the whole world because all of our economies are so closely related, ”Blinken said.

It is true that many Western media have compared the Evergrande crisis to the collapse of Lehman Brothers in the United States in 2008, raising the question of whether the Chinese economy is facing its Lehman moment, which does is that misleading. While Evergrande is China’s most indebted real estate company with more than $ 300 billion in liabilities, it is still too early to say that this will lead at a time like Lehman Brothers’ bankruptcy.

On the contrary, Evergrande is far from insolvent, a decisive difference with Lehman Brothers. As of June 30, Evergrande’s total liabilities had reached 1.97 trillion yuan ($ 305 billion) with total assets of 2.38 trillion yuan, according to its interim financial statement at the end of August.

Of course, the Evergrande crisis continues and its recent non-payment of overdue bills is a worrying sign for the entire real estate industry, which can spread contagion risks to both upstream and downstream sectors given the the economic importance of the real estate sector to the national economy. . But Evergrande’s fate is still uncertain, as he has embarked on a wave of sales to raise funds to help resolve his severe liquidity crunch.

It is also clear that China will not change its own pace of economic adjustment for the sake of external pressure or to appease the market. Evergrande’s current challenges stem from its aggressive expansion on the back of high leverage and credit bubbles, a phenomenon shared by Chinese developers. In order to curb reckless borrowing, the Chinese authorities last year published the “three red lines” according to which developers are required to guarantee a liability / asset ratio of less than 70%, a net debt ratio of less than 100% and cash – a short-term debt ratio of at least one or they like Evergrande will be prevented from borrowing more money.

The fact that authorities adhere to the “three red lines” even after the Evergrande crisis and despite signs of easing across the real estate sector indicates that China has its own set of priorities and continues to focus on deflation of the actual value. real estate bubble and reduce risk.

External pressures will not force China to change its pace of work. This is because it is only by doing our things well that China can increase its initiative in foreign relations, and this point has been proven time and again in the trade frictions between China and the United States in the past.

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