In his latest column for the Express, David Baverez, a member of the Asia Centre’s Advisory Board and an investor based in Hong Kong, looks at Evergrande’s bankruptcy, its consequences on the real estate sector and a posteriori on the Chinese growth model.
The article is available on the following link and in full below:
Why does the Evergrande shock forces China to reconsider its growth model?
While the bankruptcy of the colossal promoter threatens to spread to the entire real estate sector, Beijing is betting more than ever on the upmarket export industry. At the detriment of services.
By David Baverez, 10 years Hong Kong-based investor*.
Published on 23/02/2022 at 10:00, updated at 10:33
In the February 24 edition of the weekly
If contagion is Omicron variant’s nasty flaw , China is discovering that the same applies for real estate crises. The giant developer Evergrande’s bankruptcy, far from being contained in a managed economy, is spreading dangerously to the entire sector, which will lead Chinese authorities to fundamentally rethink their growth model for the next decade.
Real estate not only accounts for a good quarter of China’s GNP, it has also been the main driver of domestic consumption for more than 20 years, due to the “wealth effect”. Indeed, it is thanks to the overvaluation of real estate, which is now estimated to be twice as high as in the West, that the Chinese population has been able to finance its mass consumption on credit, with a level of indebtedness now similar to that of the United States. A pattern that mechanically reaches its limits in the absence of future real estate appreciation.
The new growth vector should have come from services digitalization, but the government reminded us last summer that their future development should be carried out at a pace compatible with the political control of young people, who are more attracted by the discovery of metavers than by government propaganda.
A risky choice
The plan adopted seems to be close to German or Korean models, whose GNP per capita should exceed that of France in just a few years. The rise of the export industry should follow two main lines: automation – thanks to artificial intelligence relayed by semi-conductors – and decarbonization – carbon capture being the next strategic target, after the successes obtained in the electric battery, solar and wind power.
This makes it easier to understand the true nature of the “common prosperity” promised by President Xi. It is less a question of adding up individual prosperities, as conceived in the West, than the promise of the rise of the economic power of the country as a whole. A pattern reminiscent of the United States in the 1960s, where faith in technological progress – symbolized by the conquest of the Moon – galvanized an entire population.
It will be remembered that Xi Jinping had, at the beginning of his second term in 2018, announced the program: China would first be “modern” from 2020 to 2035, before becoming “prosperous” from 2035 to 2049. This is a way of extending by fifteen years the old Chinese adage: “Rich country, poor people”.
This choice of growth pattern, which aims to give priority to productive investment over the acceleration of domestic consumption, is the opposite of the official propaganda of “dual circulation”. It is not risk-free, however, as the sharp economic slowdown of the past few months has shown – stronger than the official statistics would suggest. In the longer term, a recent study by Natixis predicted that China’s annual growth potential would be limited to 2.5% from 2030. This growth is normalized with the rest of the world, a consequence of weak productivity gains and the annual decline in population.
We can therefore see that the plateau reached by Chinese real estate speculation will have consequences well beyond the year of the Tiger. Europe must be prepared to see China strengthen its global position in pockets of excellence in forward-looking industries and, conversely, relatively disappoint in mass consumption, as well as in the digitalization of B2C services.
A gap to fill in services
And this is precisely where the United States will want to win the battle: by buying Activision for $65 billion, the biggest acquisition in the history of global tech, Microsoft is anticipating the invasion of the metaverse into the world of video games. But, above all, in the world of enterprise software, a major source of future productivity.
Though Chinese tiger may have all its claws ready, it absolutely must catch up in the service sector, which represents 70% of the most developed economies. Otherwise, the United States will have every reason to believe that time is working for them.
* David Baverez is an investor, based in Hong Kong since 2011. He is the author of “Chine-Europe : le grand tournant” (Le Passeur Éditeur, 2021), which has just been published in English under the title China-Europe: The Turning Point (Westphalia Press, 2022)