According to Fitch Ratings, one of the big three American credit rating agencies, China Evergrande Group, and Kaisa Group Holdings are officially in default. These two companies are the top two real estate development companies in China. They have combined for billions upon billions of debt.
They aren’t alone; before these defaults, multiple other smaller developers were defaulting on their debt, too.
These defaults matter because the Chinese economy is now on the brink of faltering. These companies and the bad debt they’ve racked up bear similarities to the 2008 Great Recession in the United States.
A liquidity crunch in an economic environment already reeling from inflation, shortages, and more is not something people, businesses, or governments are ready to handle.
Writing in War on the Rocks, Antonio Graceffo notes the threat this could pose to America:
Countries around the globe will suffer from slower and more expensive exports as well as reduced demand for imports. Companies in China are suffering from supply chain disruption, higher input costs, pollution curbs, and logistical issues due to pandemic measures, such as fuel rationing, electricity rationing, and disruption at ports. Factory-gate prices, the price of products at the factory, have been steadily rising. All of these circumstances have driven factory inflation to its highest level in 13 years.
Economic conditions are already poor and China’s economy is now threatening to make things worse. The Wall Street Journal reports that “Chinese leaders are trying to reverse a sharp growth slowdown without abandoning policies that triggered much of the weakness to begin with — a tricky task that could test Beijing’s ability to engineer a soft landing for the world’s No. 2 economy.”
Like central planners before them, the Chinese Communist Party’s central planners are claiming they can navigate this and land everything according to a plan. Because markets and news reporting like the concept of plans and action, China is getting the benefit of the doubt. And maybe it all works out, but the threat is genuine.
It’s not even clear if the economy is the number one concern for the Chinese Communist Party. We’ve learned that China’s version of the Federal Reserve, the People’s Bank of China (PBOC), is getting hammered by the political party.
The Journal reports:
In recent weeks, Communist Party discipline inspectors from China’s top anticorruption agency have visited the central bank’s headquarters in central Beijing. Officials briefed on the matter said the inspectors asked questions, reviewed documents and brought an unusually stern message: Beijing has little tolerance for any talk of central-bank independence; the monetary authority, just like any other part of the government, answers to the party.
Anticorruption purges in communist countries by the political party usually signify the punishment of political enemies and dissenters. And it just so happens that in 2022, the Chinese Communist Party is set for a significant power reshuffling, with Xi Jinping serving an unprecedented third term. It’s likely no coincidence that some of these purges aim at the power base of some of Xi’s potential political opponents.
In short, we have China experiencing significant headwinds right when the world is experiencing a spike with inflation and supply shortages. Meanwhile, China is focused on purging its central bank in time to deal with political upheaval in the controlling communist party. And to put a cherry on top of things, there are all kinds of news and saber-rattling over Taiwan.
Paging President Joe Biden’s office. Is anyone home?
The Biden administration spent a year in denial over the problem of inflation. It weakened the United States’s foreign policy power and influence with the disastrous Afghanistan evacuation debacle. And none of this includes how Biden has mismanaged Operation Warp Speed and hamstrung the U.S. response to COVID.
And now, they could be facing another contagion out of China, this time economical, and it’s unclear they have any idea of what is going on.
That is the real threat: contagion. Comparisons between Bear Stearns and Evergrande have been common in financial reporting. That’s not a guarantee that things will go as they did in 2008 — China has a vastly different economy and political system involved. But the United States had its institutions focused on solving that recession and building a political answer.
The Chinese Communist Party and its politburo have different incentives at play. People are jockeying for position, Xi wants to extend his stranglehold on the party and country, and an economic downturn, though alarming, is not the primary concern that it would be to Americans and their politicians.
That has ramifications for the United States and the global economy. Just as China lied and destroyed evidence to obfuscate its role in the COVID-19 pandemic, so is China doing the same thing with Evergrande and these defaults. There’s no transparency or honesty, only a focus on the political survival of the communist party.
Communism is never about the people, only the politicians trying to retain a stranglehold on power.