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Five Lessons Evergrande Taught Us About The Chinese Economy – NPR

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Last week, global markets shook after a Chinese company named Evergrande fell into what looks like a downward spiral into oblivion. Evergrande is — or was — the second-largest real estate company in China. A couple years ago, it was the world’s most valuable real estate stock. It’s also been involved in an eclectic mix of other businesses, from mineral water to electric cars to pig farming. It even owns a professional soccer team. But recently it’s been having a really hard time repaying a mammoth amount of debt, a whopping $300 billion worth.

The Evergrande story is bigger than just one company. It’s about China’s unsustainable model of economic growth, which has relied on endless investment and a mad, debt-fueled development frenzy in recent years. That model helped China soar, but the country is now experiencing some turbulence. Last week, some alarmist observers were calling this China’s “Lehman moment” — a reference to the collapse of Lehman Brothers that preceded the 2008 financial crisis — but China-focused economists argue that’s overblown.

Nonetheless, given how interconnected the global economy is, investors remain worried about the future of the Chinese economy. It’s been a nuclear reactor powering the globe’s economic growth. Troubles there could have ripple effects around the world.

[Editor’s note: This is an excerpt of Planet Money‘s newsletter. You can sign up here.]

We decided to put together a little listicle about what we’ve learned from the Evergrande story so far.

1) Real estate has been a huge part of China’s economic growth

This aerial photo taken on September 17, 2021 shows the halted under-construction Evergrande Cultural Tourism City, a mixed-used residential-retail-entertainment development, in Taicang, Suzhou city, in China’s eastern Jiangsu province. (Photo by Vivian LIN / AFP) (Photo by VIVIAN LIN/AFP via Getty Images)

VIVIAN LIN/AFP via Getty Images

VIVIAN LIN/AFP via Getty Images

China’s economic growth in recent years has been powered in large part by its roaring real estate market. The real estate industry, directly and indirectly, accounts for as much as 29 percent of China’s entire GDP. This growth has been fueled by a ginormous property bubble and mounting amounts of debt. For a while, China’s national and local governments used their massive powers of command-and-control over the economy to keep the bubble inflating. As is commonly the case in bubbles, investors and companies have taken on massive amounts of debt to capitalize on surging real estate prices. Evergrande itself amassed more than $300 billion in debt, to its banks, its bondholders, its suppliers, and its customers, many of whom pre-bought homes months, even years, before they were built.

2) China’s property bubble has created spooky “ghost cities” and “ghost apartments” throughout the nation

GREG BAKER/AFP via Getty Images

The Chinese property bubble, which observers have been talking about for years, has encouraged more and more speculation, with investors buying up properties with no intention of living in them. Unfinished and vacant buildings and apartments litter the provinces of China. Estimates vary, but around 20%of China’s total housing stock now sits unoccupied. The Financial Times saysthere is now enough vacant property in the nation to house more than 90 million people. That’s enough empty homes to fit the entire population of Canada. Or France. Or Germany.

In some cases, entire urban areas lie empty. These so-called “ghost cities” include replicas of Paris, Venice, and even Jackson Hole, Wyoming.

3) The Communist Party of China is now working to reduce financial risks and change its model for economic growth

BEIJING, CHINA – JUNE 28: Chinese President and Chairman of the Communist Party Xi Jinping appears on a large screen as performers dance during a mass gala marking the 100th anniversary of the Communist Party on June 28, 2021 at the Olympic Bird’s Nest stadium in Beijing, China.

Kevin Frayer/Getty Images

Kevin Frayer/Getty Images

One of the main differences between Evergrande’s debt crunch and the collapse of Lehman Brothers is that this crunch was brought about on purpose. The Communist Party of China (CPC) has been aware of the dangers posed by its wild real estate market for some time. In 2017, President Xi Jinping began signaling he wanted to do something about it with a speech to the 19th Party Congress. He said, “Houses are built to be inhabited, not for speculation.”

Last year, the government followed up with a policy known as “three red lines,” which aims to reduce debt in the property market, crack down on reckless borrowing, and prevent a market correction from turning into a cataclysm. The historian Adam Tooze calls it “controlled demolition” of the real estate bubble.

More broadly, Xi has been pursuing radical new policies in the name of “common prosperity,” an effort to fight growing inequality in China and intervene more forcefully in private industries.

In July, Xi released an essay outlining his ambitions for China. He said he wants the country to focus on “pursuing genuine rather than inflated GDP growth and achieving high-quality, efficient, and sustainable development.” Evergrande, a poster child for excesses of the real estate market, apparently does not represent genuine economic growth. And government policies, which once boosted the company, are now strangling it.

4) Cronyism May Have Lulled Investors and Creditors Into Overconfidence In Evergrande

BEIJING, CHINA – MARCH 06: Xu Jiayin, Standing Committee Member of the 12th CPPCC National Committee and Chairman of the Board of EVERGRANDE Group speaks during a news conference on the sidelines of the fourth session of the 12th National People’s Congress, on March 6, 2016 in Beijing, China. (Photo by Etienne Oliveau/Getty Images)

Etienne Oliveau/Getty Images

Etienne Oliveau/Getty Images

Evergrande was founded by Xu Jiayin, who not that long ago was the richest man in China. Jiayin is well connected. He is a member of the Chinese People’s Political Consultative Conference, an elite group of advisers to the government. He’s also politically shrewd. For example, he reportedly got Evergrande to buy Guangzhou Football Club after President Xi Jinping said he wanted China to have a great soccer team. The company then sank millions buying some of the best soccer players in the world.

The New York Times suggests that Xu Jiayin’s connections gave investors and creditors confidence that the company could keep borrowing and get bailed out by the government if things went bad. They thought Evergrande was too big and too connected to fail. In August, however, as the company began to wobble, Xu resigned as chairman of Evergrande’s real estate arm, sending it tumbling further.

5) Evergrande may be just the tip of the iceberg

SHANGHAI, CHINA – AUGUST 29: Boats travel on the Huangpu River as the skyline of the city in the Pudong district is seen on August 29, 2020 in Shanghai, China.

Kevin Frayer/Getty Images

Kevin Frayer/Getty Images

China’s growth in recent years has depended heavily on a gargantuan expansion of real estate and all its accoutrements — trains, bridges and sewers. China has been building and building and building, creating lots of economic activity in the country. With Evergrande, that type of growth is finally showing itself to be unsustainable — and the Chinese economy is in for a period of turbulence. The weird part is this seems to be, in part, by design. We still have questions. How forcefully will China act to contain the damage done by Evergrande? Will China be able to successfully shift its economic model away from real estate and endless development? How will this shift affect the broader global economy? We’ll be paying attention in future weeks.

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Province Invests in Midland Automotive Parts Manufacturer to Boost Local Economy | Ontario Newsroom – Government of Ontario News

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Province Invests in Midland Automotive Parts Manufacturer to Boost Local Economy | Ontario Newsroom  Government of Ontario News



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UK's economy gathers speed, inflation pressures mount – PMIs – Financial Post

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LONDON — Britain’s economy unexpectedly regained momentum in October and cost pressures rose by the most in more than 25 years, according to a survey on Friday that could encourage the Bank of England to raise interest rates for the first time since the pandemic.

The preliminary “flash” IHS Markit/CIPS flash Composite Purchasing Managers’ Index rose by the largest amount since May to hit 56.8 from September’s 54.9. By contrast, a Reuters poll of economists had pointed to a further slowdown to 54.0.

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“The UK economy picked up speed again in October, but the expansion is looking increasingly dependent on the service sector, which in turn looks prone to a slowdown amid the recent rise in COVID-19 cases,” said IHS Markit’s chief business economist, Chris Williamson.

The rise in the PMI was driven by Britain’s services firms as consumers and businesses picked up their spending. Travel firms benefited from a relaxation of COVID-19 travel rules.

Service sector activity outpaced manufacturing output by the widest margin since 2009 as factories struggled again with shortages of supplies and staff and recorded barely any growth.

A rise in overall employment was close to August’s record high, despite problems in filling vacancies.

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Higher wages and the worsening supply shortages resulted in the fastest increase in average costs since the combined composite index was launched in January 1998. Separate PMIs for the services and manufacturing sectors showed prices charged by firms rose by the most since these series began in 1996 and 1992 respectively.

With inflation set to hit more than double its 2% target soon, the BoE is expected to raise borrowing costs soon as it tries to make sure that rising inflation expectations do not become embedded in British businesses’ pricing decisions.

The Confederation of British Industry said on Thursday that manufacturers were raising prices by the most since 1980 in the face of some of the biggest increases in costs and labor shortages since the 1970s.

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The PMI for the services sector rose to 58.0, its highest in three months, while the manufacturing PMI’s output component – which IHS Markit says currently gives a better picture of the sector than the headline index – sank to its lowest since February at 50.6.

Despite the improved picture for most companies, many consumers are concerned about the outlook for the economy.

A survey published earlier on Friday showed Britons were their most downbeat since they February, when they were under lockdown, and are increasingly worried about the year to come as prices and COVID cases rise. (Reporting by William Schomberg; Editing by Hugh Lawson)

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Dollar set for another week of losses even as Fed tapering looms

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The dollar was heading for a second week of declines on Friday as sentiment stayed tilted towards riskier assets, while an intervention by the Australian central bank put a halt to the Aussie dollar’s recent surge.

The dollar index was last at 93.733, little changed in Asian hours but off 0.24% on the week, as it continues its fall from a 12-month high of 94.565 hit in earlier this month.

It had managed to stem losses on Thursday, bouncing on better U.S. jobs and housing data, but the rally petered out on Friday morning in Asia, where risk sentiment was boosted news that beleaguered developer China Evergrande Group has supplied funds to pay interest on a U.S. dollar bond, averting a default.

But traders are still trying to assess whether the dollar has scope to fall further, or if this is a temporary blip on a march higher.

“People are wondering whether we are at an inflection point, as the dollar has been weakening and that doesn’t really fit with the broader narrative that global growth is cooling and the Fed is on the path to tapering, which should be supportive for the dollar,” said Paul Mackel, global head of FX research at HSBC.

On Friday, benchmark 10-year U.S. Treasury yields were at 1.6872%, slightly off from Thursday’s multi-month high of 1.7%, as markets continue to prepare themselves for an announcement by the Federal Reserve that it will start to wind down its massive bond buying programme, which is widely expected for November.

Mackel said part of the reason for the dollar’s weakness had been strong performances by currencies from most commodity exporting countries.

These were quieter on Friday, however, as traders took profits, analysts said, and energy prices softened.

Brent crude, which had risen above $86 dollars a barrel on Thursday, continued its tumble and was last at $84.10.

The Australian dollar was at $0.7475, off Thursday’s three-month top, as the boost to the China-exposed currency from Evergrande’s news was outweighed by action from the Reserve Bank of Australia to stem a bond sell off, as well as the pause in energy price rises.

The RBA said on Friday it had stepped in to defend its yield target for the first time in eight months, spending A$1 billion ($750 million) to dampen an aggressive bonds sell-off as traders have bet on inflation pulling forward rate hikes.

Also affected by energy prices, the Canadian dollar slipped to C$1.2352 per U.S. dollar, off Thursday’s C$1.2287, a level last seen in June.

The British pound paused for breath at $1.3798, off a month peak hit earlier in the week, to which it had been carried by growing expectations of an interest rate hike to combat rising inflationary pressures.

The euro was little changed at $1.1627, while the yen wobbled within sight of its multi-year lows, with one dollar worth 114.01 yen, compared with 114.69 earlier in the week, a four-year low.

China’s yuan eased against the dollar on Friday after the FX regulator warned of possible action if the currency market is hit by greater volatility following its recent rally. But the yuan still looked set for the biggest weekly gain since May.

Bitcoin was at $63,928, a little off Wednesday’s all-time high of $67,016

 

(Reporting by Alun John; Editing by Sam Holmes and Kim Coghill)

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