China Keeps Proving Financial Doomsayers Wrong

A chair professor of finance at the University of Hong Kong.

HONG KONG

Remember the Evergrande crisis?

It was little more than a year ago that Evergrande Group, the Chinese property developer, was about to collapse under more than $300 billion in debt. There were warnings of a catastrophic default that would ripple through China’s economy, maybe even set off a global depression. China, it was said, faced its Lehman Brothers moment — when a corporate failure like that which felled the once-venerable Wall Street investment bank in 2008 finally forces Chinese Communist Party policymakers to reckon with systemic financial weakness.

Not quite. Evergrande is not out of the woods, but a catastrophic implosion was avoided after the Chinese government stepped in to help arrange a restructuring of much of its debt. Well before a new threat to the global financial order emerged this month — the collapse of Silicon Valley Bank in the United States — Evergrande had largely fallen out of the headlines.

Evergrande’s troubles weren’t the first time we’ve heard predictions of Chinese financial doom. They tend to resurface every few years. But Wall Street, the Western media and economists who repeat them make the fundamental mistake of applying pure market logic to China’s economy, and it just doesn’t work that way.

China is still not a fully market economy, despite the country’s 2001 entry into the World Trade Organization, decades of economic reform and a slow but steady integration into the global financial system.

That doesn’t mean China can indefinitely defy economic orthodoxy, and debt levels in its financial system are alarmingly high. But the doom and gloom are usually overblown because the government has virtually unlimited power to head off crises by directing resources — and apportioning pain — as it sees fit, often by ordering banks and other creditors to accept losses for the greater good before things get out of hand.

Evergrande is a prime example. One of China’s largest real estate developers, it amassed huge debts to expand its business, as did many of its rivals. But when China’s government began imposing financial restrictions on property companies in 2020 out of concern over spiraling debt and home prices, Evergrande was cut off from further fund-raising and formally defaulted on its debts in December 2021. The “Lehman” warnings reached a crescendo.

But Chinese officials had already been at work corralling

Evergrande executives, creditors and potential asset buyers to begin restructuring the company’s obligations. Domestic lenders eventually agreed to give Evergrande more time to repay loans.

In China, financial institutions have to do what the government tells them. The government’s hand is everywhere. The most fundamental asset in China — land — is owned or controlled by the state. The value of China’s currency, the renminbi, is government-managed and regulators are widely believed to intervene in trading on the country’s stock markets.

Most of China’s biggest and most powerful companies, including all of its major banks, are state-owned, and executives are usually members of the Communist Party, which controls top-level corporate appointments. Party committees within corporations further ensure that many important business decisions align with government policy. Even healthy and influential private companies can be ordered to undergo painful restructuring or curtail certain business operations.

China’s regulatory troubleshooters have proved the financial doomsayers wrong again and again. But their biggest test may yet lie ahead.

The nation has managed to dodge its Lehman Brothers moment … so far.