TOKYO – As distracting as the default drama looming over China Evergrande Group may be, the one percolating in Washington is by far the more existential of the two.
The contours of the pressure facing the world’s most indebted property developer are by now well known. With about US$305 billion of debt and $355 billion of assets amid slowing world growth, Evergrande stands as a microcosm of China’s biggest challenges.
Fresh waves of Covid-19 scam are colliding with efforts to get construction sites back up and running. And Evergrande has roughly 1,300 ongoing projects in second and third-tier mainland cities.
The company’s travails affect 200,000 direct employees and nearly 4 million hired each year for development projects.
The real worry, though, is its knock-on effect as the major player in the most vital sector of the mainland economy. Yet however much that is a risk for a key global economic engine, it remains, essentially, a domestic one.
All odds are that the People’s Bank of China and President Xi Jinping’s myriad brigades of regulators will continue to avert the Lehman Brothers-like contagion markets fear.
For now, economists view Evergrande as the canary in the coal mine. The metaphorical coal mine is China’s property industry: The key engine for translating Beijing’s credit and debt accumulation into growth and jobs.
An Evergrande stumble would represent a breakdown in the Chinese model and serve as an omen of bank-debt troubles to come.
That, in turn, would likely lead authorities to “new canaries in the current financial coal mine” that require attention at the highest levels, says professor Robert Hockett at Cornell University.
China’s authorities have a very clear motive, and the necessary means, to contain any threat of a systemic crisis in the country’s domestic financial system.
But Evergrande’s troubles do pose a significant risk of international contagion across emerging markets, which investors would be rash to ignore.
All bets are off, though, if Washington fails even more spectacularly. Brinksmanship over the US debt ceiling is bringing back traumatic memories Beijing would prefer to keep buried.
An earlier debt-limit skirmish in August 2011 cost America its AAA rating from Standard & Poor’s. That came as Republican lawmakers pushed the world’s biggest economy to the brink of default.
The fiasco left China, then the biggest holder of US Treasury debt, cold. At the time, the Chinese government condemned the “short-sighted” wrangling in Washington and urged lawmakers to act more responsibly.
Trump’s trade war came on top of his frequent tirades about China “killing” American workers with an undervalued exchange rate.
By the time he turned the keys over to Joe Biden in January, the US government was on course to a $30 trillion debt burden. That’s twice the size of China’s annual gross domestic product (GDP).
A disruption in government spending means no government paychecks to spend at the mall, lost business and revenue to private contractors, lost sales at retail shops, particularly those that circle now-closed national parks, and less tax revenue for Uncle Sam.
What’s more, the message all this sends would cause chaos in debt markets and slam the stock market, too. The shutdown and the looming debt ceiling combined could significantly hurt business and consumer sentiment, as well as the overall economy.
Treasury Secretary Janet Yellen reached out to the CEOs of Wall Street’s biggest financial firms to ask for their help in urging Republicans to step back from the default ledge. Now, the Treasury is reaching the limits of this strategy.
Yellen’s pitch is for investment banking giants to lobby lawmakers to raise the debt ceiling. She also is pitching for a one-year suspension in the need for Congress to okay the paying of Washington’s bills.
Yellen’s calls reportedly went to JPMorgan Chase’s Jamie Dimon, Citigroup’s Jane Fraser, Wells Fargo’s Charlie Scharf, Bank of America’s Brian Moynihan and top Goldman Sachs executives.
Technically, the US government blew past the previous debt ceiling several months ago. Treasury Department officials employed a variety of cash-balance maneuvers to pay Washington’s bills month to month.
Even bigger questions hang over the global financial system. The efforts by China, Russia, Saudi Arabia and other major economies to de-dollarize world trade is a work in progress, at best.
The same goes for developing Asia, which spent the years since the region’s 1997-98 financial crisis pledging to wean economies off the dollar.
Try as export-driven economies may, the dollar and US Treasuries are still the linchpin of the global trading system. Yet the political shenanigans on display in Washington could change that – and quickly.
The “empire is crumbling” and the dollar is “slowly losing its sheen. Slowly, but surely, the dollar “is losing its weight in the international financial market.
Technological change is accelerating the timeline, particularly as China outpaces the USA in the race to bring a central bank-issued digital currency to market.
With the explosive proliferation of cryptocurrencies, including China’s introduction of a digital renminbi, it is not surprising to hear panicked warnings about the looming decline of the dollar.
The dollar is at the mercy of politics and politics can be highly toxic. If the current squabbling in Washington devastates trust in the core asset of the global financial system, current obsessing over China Evergrande will become a mere side show.
Asia Times / ABC Flash Point Economic Bribery News 2021.