Is this a Schadenfreude moment for Chinese skeptics?

Yet, even absent contagion, the Evergrande saga is just the tip of the iceberg of an overly heated and indebted property sector that potentially threatens the building up of the larger Chinese economy and, therefore, indirectly, the global economy as well. In a fascinatingly long read, British-born historian Niall Ferguson makes such a case (“The Fall of Evergrande Shows How Xi Created the China Crisis”, Bloomberg Opinion, 26 September bloom.bg/3a9kcwi)

As Ferguson observed, Evergrande embodies a China that has evolved over the past decade with an economic growth paradigm based on “urbanization on steroids”. Of all the skyscrapers, both commercial and residential, dot the landscape of Chinese cities, large and even small, many of them remain vacant and their property developers are struggling to put up buildings to begin with. are unable to sell enough units to pay off the debt incurred.

In other words, the wealth sector in China, even larger than that of the US on the eve of Lehman’s fall, is a ticking time bomb that could have significant macroeconomic consequences beyond the property and financial sectors through influence on Chinese households. The property market is heavily invested in which has been in bubble territory for some time. Citing research by Harvard economics professor Kenneth Rogoff and his co-author Yuanchen Yang of Beijing’s Tsinghua University, Ferguson notes that housing assets account for 78% of total wealth in China, up from a 35% share in the United States. is too much. Example. The result is that consumer spending in China is, according to Rogoff-Yang, “more vulnerable to declining housing prices” than in the US. The effects of a more generalized collapse in the property market in China could be large and consequential for the global economy.

For those who have a long memory, none of these recent developments should come as a surprise. As long ago as 2004, economist James Dean and I argued, and as I summarized Mint Reader much later (“Will the elephant cast a shadow on the dragon?”, March 5, 2015 bit.ly/3ixSLyx), that the Chinese model is characterized by a clear contradiction between ever-increasing economic freedom and an authoritarian political system. Furthermore, the Chinese communist authorities’ economic development paradigm focused on an infrastructure-driven, “build and they will come” model, in contrast to, say, the Indian model in which new infrastructure is driven by the supply-demand for it, the opposite. Instead.

The result, as Dean and I argued in 2004, was a Chinese development success story that was like a deck of cards, and built on exorbitant investments, including housing – which was called the Austrian School of Economics “accident”. Will say Chinese growth. Therefore, the figures will be inflated in a significant sense. After all, if the economy grows rapidly due to the stock of assets and infrastructure that is ultimately never used, and which leads to the accumulation of large debts, then such rapid growth may be sustainable and, a In a certain sense, deceptive.

So far, China’s skeptics, including your columnist, have been intrigued by the fact that successive generations of Chinese leadership have shown a remarkable ability to refresh and reinvent their models—both economic and political—thus Ensuring that the growth rate remains high and the ghosts of social anarchy and unrest stay away. Every Chinese leader since Deng Xiaoping and his pioneering reforms of the late 1970s has managed to maintain an unwritten but all-important bargain with the public: “We’ll give you the opportunity to get rich, and the price is that You should stay out of this politics”. But perhaps, perhaps, the chickens may have finally come home under the oversight of the authoritarian tycoon, Xi Jinping – who, writing in 2015, I believed could lead to an “explosion” in the Chinese economy or a “delayed and disorderly democratization of society”. .

What may be different this time is that over the years, Xi has begun to rewrite the unwritten social agreement, and to increase government and party control over the economy, and what he What clearly believes is a highly independent and insufficiently regulated market economy has begun to rule it. , undoing the basis for Deng’s reforms. He is previously quietly and now openly building a cult of personality to coincide with Mao’s. If the economy and public mood deteriorate, Xi could ruin these options.

Vivek Dehjia is an Associate Professor of Economics and Philosophy at Carleton University, Canada.