Because China is scary on Wall Street
All the risks of systemic spill-over in China, while the Fed and the US Treasury have little ammunition. Guido Salerno Aletta's analysis
We are on a very thin ridge: the economic recovery is supported only by the trust that citizens, businesses and even more investors place in the ability of Governments and Banks to support them in overcoming the difficulties and complexities of a truly unprecedented situation. human memory.
In the USA and Europe, for over a year and a half now, since a health and then economic crisis began, there has been a complete decoupling between the trends of the real economy and those of the financial system: the immense injections of liquidity introduced by central banks supported and inflated share prices and prevented interest rates on debt from rising exponentially due to increased risks to corporate stability. The massive government deficit spending interventions and the guarantees issued on new corporate debts made it possible to overcome the most critical phases.
Meanwhile, the US strategic repositioning towards China continues, which is now seen as the main competitor on the geopolitical level and not only on the economic one.
Conversely, Beijing is settling the very heavy accounts of an entire decade of emergency economic initiatives that were taken, particularly in the real estate and infrastructure sectors, to counter the extraordinarily serious effects, the spill-overs, of the American crisis of 2008. which had collapsed world trade. An entire economic system based on the production of goods for export suddenly found itself faced with a blockage of international demand: the State, the local political authorities, the banking system launched a series of unprecedented initiatives for the construction of real estate for use. housing and for the construction of all kinds of infrastructures, from highways to high-speed railways. This new internal demand, destined to absorb unemployment, has set in motion a series of vectors that are difficult to control: the choice of areas on which to build buildings or public infrastructures was decided at the local level by the same political leaders who also had the possibility of push banks to finance its implementation. All this has absorbed enormous capital, even speculative, just as the purchase of real estate has often been carried out for speculative purposes. A real estate bubble has been created, both in terms of new physical construction and higher value homes, all financed in debt by banks and developers.
The banks used a lot of deposited savings for these initiatives, underwriting the debt securities issued by the "developers", financial entities that acted as intermediaries with the builders of the properties and then with the buyers of these. And many Chinese, especially wealthy entrepreneurs, not only used their savings to buy a first home, but also bought a second one and sometimes more, perhaps getting into debt, counting on the fact that prices were going up continuously: they had in debt for a house that was initially worth a hundred, but this rapidly grew in value. Easy enrichment and speculation, at all levels: a bit like what happened in the US until the sub-prime crisis.
The indirect effects of the recession caused by the health crisis are also felt in China: both the conditions of financial solidity and economic growth that had been regained after the extraordinary interventions mentioned above have begun to fail, especially considering the recovery in demand. world.
While the spill-overs of the 2008 American crisis had been overcome, most of the debts incurred to overcome them still remained to be paid: the new health crisis of 2020 acted as a detonator. This is where the potentially systemic crisis that is being addressed in recent months by the Chinese authorities, both at the political and financial surveillance level, arises: the speculators who have enriched themselves are unable to meet their commitments, the carrying value of the real estate assets that they had given investors as a guarantee that they had bought their bonds is too high for the market. They are therefore unable to sell and collect to honor their commitments: this is the danger of systemic default that can be glimpsed.
The political authorities in Beijing and the financial surveillance have no intention of giving a blow in the towel with a public bailout: they would make a gift to speculators, which would be socially indigestible. An internal settling of accounts is underway, a sort of political process, which cuts the nails of the many, perhaps too many, who have enriched themselves in this way. Not only that, but unlike the US and Europe, in China there has not been the huge injection of liquidity that has caused corporate stock values to rise enormously, despite the deep recession: there was already too much debt around, and the new liquidity would have acted as an accelerator, if not a detonator, of a truly devastating financial crisis.
The prices of the Chinese financial and industrial system are not as inflated as the American ones and most of the European ones: on the contrary they tend downwards, as the adjustment crisis continues.
It is therefore Beijing that now has the holding of the global financial system in its hands: if it lets a systemic financial operator, such as Evergrande , fail, it knows that it will unleash uncontrollable reactions especially in the West, and in particular on Wall Street: first of all the value of the hundreds of dollars would collapse. Chinese companies that are also listed in the US, and this fall would bring along the rest of the list. There are many global investors, Americans in the first place, who have securities of Chinese issuers in their portfolios: they have a portfolio at risk of write-down and are very stingy with news about it: no one knows exactly who and what they have bet on.
This opacity, this confidentiality in business that has hitherto protected very lucrative business in China, is now in danger of turning into a boomerang: if investment funds declare individual exposures in China they must immediately declare any losses; but if they do not declare them, it is worse, because they would feed the worst suspicions, even if unjustified.
As equity values in the US and Europe have risen very high, the risk of a sharp correction may come from China.
Beijing has a whole box of matches in its hands, and it knows it has the power to control much of the consequences of its decisions within China.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/cina-wall-street-stati-uniti/ on Sun, 26 Sep 2021 06:00:48 +0000.