Ignore the hype, Chinese leaders can’t reshape economic reality


While concerns about Evergrande seem to have subsided, none of this means there’s nothing to learn from what happened. China’s real estate giant is a helpful reminder of how politicians and bureaucrats lack the capacity to sustain or grow an economy. Not at all.

This is worth mentioning as news from Beijing signals alleged economic support from Chinese leaders. In a recent front-page article (“Beijing Moves to Cushion Economy As Risks Worsen”) at the wall street journal, Stella Yifan Xie reported that “Chinese leaders” cut “two key interest rates” in “response to the impact of pandemic restrictions and a housing market slump.” At best, these machinations will come to nothing. And the reasons are obvious.

The most obvious is that market interventions do not work. By definition. Markets are not political or tilted one way or the other. Just the markets are. They are a reflection of what is known here and now. They are blind to ideology verdict. Please bear this in mind with government interventions intended to “cushion the economy as risks worsen”. The translation of the latter is that the rulers of Beijing will lean against the truth-teller that is the market itself. Markets are signaling their dismay at the pandemic restrictions, and they are similarly signaling the mistakes made by investors in allocating capital to real estate.

In which case Beijing aims to reshape reality. Even if it succeeds (it will not) in overwhelming the market message, such a move will not improve the Chinese economy. We know this because restrictions on human action are, by their very name, a drag on growth, and China’s leaders are trying to cover up their own freedom-limiting mistakes. Equally harmful would be attempts to limit the market’s message about misallocations of ownership. It’s the equivalent of congressional intervention in the failure of Warren Beatty and Dustin Hoffman Ishtar like a goad for the stars to do IshtarII. Massive federal support (purchasing tickets to empty theaters) could theoretically have created a blockbuster that would otherwise be a flop, but doubling down on evil is rarely good. The film industry is strengthened by its failures precisely because failure teaches it to succeed. Applied to China, how will this help the real estate market and the economy more broadly if bad decisions are subsidized?

To which some will say the ability to limit the pain of bad decisions is proof that government interventions actually work. Precisely because the government can spend to soften the pain of evil, it can also soften the blow of Evergrande’s collapse by supporting it. Of course, but that’s just what is visible.

What is not visible is what intrepid investors might achieve if they were able to acquire properties or resources at low prices. Economic growth is a consequence of investing in ideas that are often unknown, untested and potentially transformative, but what is unknown, untested and potentially transformative is usually expensive. It’s risky. This is important given the bailouts. They limit the potential decline in prices, making it harder for buyers of distressed assets to take big risks. Investors simply have a lot more leeway to make bold bets if they can buy distressed market assets for 0.25 cents on the dollar versus 0.75.

Worse still, all companies and entrepreneurs willing to rush a different and more dynamic future in the present must have access to valuable resources (capital) in order to take giant leaps forward. Except that while the government is providing a so-called “cushion” for a weakening economy, by definition it is keeping valuable capital in the hands of those who have misused or abused it, as opposed to those who wish to treat it better.

Simply put, bailouts are always and everywhere an economical wet blanket. It’s been said here since 2008, but ultimately it will be conventional wisdom that interventions overseen by the George W. Bush administration and Ben Bernanke’s Fed did not avert a crisis, rather they were the crisis. Absent their naive interference, 2008 is actually a year instead of an adjective.

Which brings us back to Evergrande. There’s more to his story than just debt issues. To understand why, consider the monetary denomination of much of its debt. It’s in dollars. That says a lot, especially about the globalization of capital. Although Evergrande is based in China, it is evident that the financing of its business activities is globalized.

In itself, the above is a positive statement of the growing interdependence of the global economy, but it also speaks to the madness of “Beijing” trying to dampen the Chinese economy. Good luck.

Indeed, assuming the Chinese economy actually shrinks, rest assured that global financial intermediaries will draw far more capital from China’s trade sector than Beijing can add. There is no stimulus to speak of here. The money goes where it is treated well, and if the markets have decided that Chinese producers are overwhelmed, no interference from Chinese bureaucrats will alter this truth. All leaders can do is slow down economic growth by subsidizing what market players don’t want.

Conversely, assuming the markets are wrong about China’s growth prospects, rest assured that global financiers will know this much sooner than senior officials in Beijing. Put simply, if there is abundant potential for progress in China, abundant funds from around the world will be there to fund it. The government cannot make great what is not.


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