Evergrande's $300 billion debt turns the spotlight on to the increase in unproductive and speculative investment that has given a fictitious boost to Chinese national capitalism.
The Chinese real estate market (officially strictly "socialist"!)1 has been showing signs of crisis ever since the China Evergrande Group failed to pay interest on an offshore bond and revealed itself as the most heavily indebted real estate group in the world. This is a sign of a possible formal recognition of what is a substantial real default. The entire Chinese property sector has been shaken: the aggregate interest coverage ratio2 of the 21 real estate groups listed in Hong Kong was in danger, and immediately dropped to 0.94.
Admitting to a debt of $300 billion clearly reveals the type of investments that the Chinese “socialist market economy” (sic) boasts about. As far as the real estate sector as a whole is concerned (the state-owned as well as the private part), this includes "zombie" companies, just like the 15-20% of companies in other major capitalist economies. The Chinese authorities don’t sleep at night over the possibility of huge failures. To the point that in January trading of shares in Huarong, the largest manager of bad loans in China, had to be suspended: its annual financial statement had been delayed too long and it ended up in August with a heavy loss.
The concerns that plague Beijing are about to become a mortal burden. With a set of debts that are close to unsustainable, starting with those accumulated in the property market, the People's Bank of China has now moved to try to regulate real estate financing.
Evergrande's $300 billion debt turns the spotlight on to the increase in unproductive and speculative investment that has given a fictitious boost to Chinese national capitalism. In particular, the private sector which — instead of building houses for the working class who were being urbanised or other infrastructures required more generally for the "people" — devoted itself to the "needs" of a now openly bourgeois clientele. Thus a market for houses with very high prices has come into being: 20% of Chinese GDP is “mercantilist”3 and the particular development of the real estate sector, with a market whose growth has positively influenced the high GDP numbers, is proof of this.
Now, with the current slowdown in GDP that also exists in China, there is the problem of an alarming worsening of the ratio of capital investments, on the one hand, to increases in GDP, on the other. While the quantity of invested capital has in fact — in recent years — been constantly growing, real GDP has slowed down or, as lately, regressed. Since there is no solution for Beijing's "capitalist-socialism" other than to increase industrial productivity, there is an attempt to expand investment in technology which — by replacing a substantial part of the living workforce — leads to a decline in the average rate of profit. We are witnessing the complete transformation of the organic composition of industrial capital. In China the phenomenon is being fully revealed as capital moves to the unproductive sectors, the financial ones, under the same illusion as happens in "Western" capitalism, that value can be gained from there. Meanwhile, paradoxically, state investments continue to stimulate the introduction of new technologies to increase the volume of goods that are supposed to be absorbed by a market that in fact is shrinking rather than expanding...
And so, the real danger that Evergrande's "insolvencies" will spread beyond the real estate sector, is throwing the entire Asian bond market, previously considered to be high yield, into great turmoil. Now the danger of default applies not only to the debts themselves but even to the interest payments on the debts! In conclusion: direct investments by the Chinese state had, at first, increased overall demand and — apparently — "pushed away" the recession. However, this meant maintaining a high level of investment in value-producing capital, while this was entering a crisis on a global level and so the country has inevitably entered the vortex of the explosive contradictions of the "development" of exchange value.
As with capitalism in general: the worst is yet to come!
DC (Battaglia Comunista)
21 November 2021
Photo from: CRCHF, commons.wikimedia.org
- 1"Socialist market economy" or "socialism with Chinese characteristics" is the official description ascribed by the Chinese Communist Party to China’s economy. Needless to say, there is nothing "socialist" about this state-managed capitalist economy, born out of a bloody civil war between two sets of nationalists where Maoism triumphed on the back of the working class and poor peasants.
- 2The interest coverage ratio is a debt and profitability ratio used to determine how easily a company can pay interest on its outstanding debt.
- 3I.e. simply based on buying cheap and selling dear. (Trans)