China’s losses are real and someone needs to pay

China’s real estate crisis has pushed the nation’s economy to the edge of a cliff and it’s time to decide who will stop it falling.

In 30 major cities, new home sales have dropped by more than 50 per cent.

Some property developers are so desperate, they’ve offered to accept peaches, watermelons and garlic as down payments. (If you don’t believe me, you can read about it here.)

In recent months, I have told you about the bank runs, the mortgage boycotts, and the resulting violent protests.

I’ve detailed how the unprecedented debt crisis facing Chinese developer Evergrande could bring the global economy to its knees.

Now, it’s time for the Chinese Government to act.

There will be winners and losers

Patrick Boyle, a prominent fund manager and finance author, explains it simply: There’s a gaping hole in China’s economy – and the government needs to decide who is going to fill it.

“The losses are real and can be absorbed by the central government in Beijing, the banking sector, the local government sector, the business sector, Chinese households, or some combination of that list,” Boyle said in a recent podcast.

“The wealth transfer required to fill the holes that exist can come from increased taxes on either individuals or businesses, defaults, currency appreciation, inflation or wage suppression.”

A political decision

But Boyle also makes the observation that the Chinese Communist Party’s national congress is coming up in mid-October, and until then Chinese regulators are likely to prioritize stability over any drastic action.

“There are many ways that this situation can resolve itself, but one way or another, it will be a political decision, where the central government decides who the winners and losers are going to be,” Boyle said.

“The market for new homes has collapsed in China and news of bank runs and mortgage boycotts have only made the situation worse.

“The losses can’t be erased, the only question is which sector of the economy will be forced to take the loss.

“The decision as to who takes these losses will of course have huge long term economic implications.”

Kicking the can down the road

Patrick Boyle says most of the solutions being put forth for the problems in the Chinese financial system don’t actually solve any problems.

“They’re mostly just ways of postponing a painful situation by restructuring and extending these losses further out into the future,” he said.

“There’s a chance that we’ll see a lot of economic stimulus to kick start the property market and increase confidence among lenders and bank depositors.”

An image of Patrick Boyle
Fund manager and author Patrick Boyle

Boyle says it doesn’t seem very likely that the cost of these losses will be pushed to the business sector through higher taxes or lower subsidies, as this would likely grind growth to a halt in China.

He also believe it’s equally unlikely to see these costs being allocated to the agriculture or the mining sectors as “it does appear that the government is looking to grow these sectors to make the country more self sufficient”.

“That leaves us with the government sector and large government-owned banks as being most able to absorb both the cost of these losses and the cost of rebalancing the economy, away from real estate and infrastructure investment, which makes up a huge percentage of Chinese GDP.

“It’s very hard to predict what will happen though, as this will be very politically driven.”

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