There’s an extra dimension to your excellent analysis of the possible consequences of an Evergrande standard (“The Real Meaning of China’s Evergrande Problem”, Opinion, Free dinner, FT.com, September 30; ‘The end of’ build, build, build ”, Great reading, 23 September). This is the likely outcome to China’s world economy’s decision to burst the speculative bubble in its real estate market.
The bubble was based on China’s massive stimulus program after 2008, which essentially became ‘subprime on steroids’. And unfortunately, this has led many suppliers outside China to expand capacity in the belief that China has suddenly become middle-class by Western standards.
They saw that car sales nearly quadrupled between 2008-2017 to become the largest market in the world, and they could not realize that this was mainly due to speculative real estate gains. Similar excitement has been seen in areas as diverse as oil, metals, plastics and luxury goods.
But in reality, as government data confirms, 600 million Chinese currently live on less than $ 150 a month and per capita wage income is currently only $ 3,135 a year. President Xi Jinping has emphasized since 2017 that the government believes “houses are to be lived in, not speculation”.
As your correspondents warned, it is likely that the end of the bubble is now underway, along with China’s country-driven development model.
This creates a real risk for another Minsky moment (the term coined by US economist Hyman Minsky), as seen at the end of the US subprime bubble. The collapse of Lehman Brothers in September 2008 meant that investors suddenly realized that they had overpaid their assets, and that they were running en masse for the exits.
Investors are now running another serious case of buyer remorse, as real estate accounts for 29 percent of China’s gross domestic product.
After all, many valuations in the financial markets are at a more extreme level than in 2008, due to the belief that China’s demand growth is unstoppable.
Chairman, New Normal Consulting