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We need to talk about Evergrande

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Written by   69
1 month ago

The economy is not predictable only because of the effects external to the market, which create a situation of extreme noise. If economic agents behaved within the axioms of rationality or bounded rationality, both based on the optimization of their personal gains, as appropriate, still complex, but much more precise.

China is a total obscurity for any analyst, who tries to predict where the market is heading, precisely because it has an economic system... let's say hybrid, not to mention bizarre. Try to put Communism and Market in the same sentence, you certainly don't need to have read “Capital” to know that it doesn't make any sense, but it's almost like China calls itself a “Market Socialism”. And that's high noise! For basically two reasons:

  • The risk of Chinese authoritarianism in the planning of any economic entity and its investors, and their divergence of goals (Individual profit vs. Communist ideology); and

  • Clear boundary between where there is a market and where there is no market, and consequently, when and how the rules of the game can change.

A state bigger than the economy

Honestly, if it weren't for all the power of the Chinese Party and its ability to boost world demand, via low labor and energy costs, as well as total social control, it would be impossible to imagine such a dynamic market economy, which does not stop grow for many years. For the lack of a free economy and basic capitalist principles would not be able to sustain such a thriving economy.

Let's look at the South Korean success story, in which the state allied with the capitalist bourgeoisie and families set up empires such as Samsung, Hyundai, among others, that although there is strong state action, the basic principles of capitalism remained, such as the freedom to accumulate and the right to private property, which have created a strong and thriving economy in a country with far fewer resources than China. In Korea the rules of the game were well planned, including how far the state could act, and both with the same ideal, the pursuit of prosperity and wealth.

China, through companies like Evergrande, boosted its economy and the world economy with the demand for commodities for its real estate sector. Several cities were transformed, without any inhabitants, just to heat up the economy in the short term, and provide housing for the new social classes in access in China in the long term. However, although many people choose to move up in social class in China they are not looking for these homes, because they prefer to be close to the places where they work, and have easier access to goods and services, another problem is the drop in the increase in families Chinese.

It is at this point that it must be necessary in State intervention, when the State takes an individual initiative, which must be accompanied by the market, and creates distortions, through the incapacity of economic calculation. Instead of providing support to entrepreneurs and, consequently, to workers, taking the majority responsibility in economic planning for themselves, it ends up putting even more risk in the enterprise.

A new economic crisis

Evergrande has approximately $300 billion in liabilities, more than any other real estate developer in the world! And now with all this structure doomed to failure, it would be up to the Chinese government to intervene to save only the company, but the world economy, however, it is the Chinese government that is retreating and reducing resources to the sector, given the failure of the undertaking.

Note that this is very contradictory, after all, the State created the bubble and it is generating fragility, which could eventually burst this bubble… And this omission by the Chinese government, so far, is leaving the financial market with serious fears. Via the contagion effect, if the Chinese government does nothing, we will certainly have a serious economic crisis due to corporate insolvency, as in 2008. However, with a greater potential impact, as the world is leveraged, because of the pandemic.

The crypto market would collapse again, very close to the downgrade of more than 60% of the BTC in the crisis caused by the pandemic in March 2020. However, with the central banks no longer able to intervene in the economy, the recovery should take longer. The BTC and other cryptocurrencies quickly overcome the 2020 crisis because of these stimuli, and it is still not clear how much firepower of central banks around the world would still be compared to this new economic crisis.

Conclusion

I confess that I'm already taking action on this, increasing my exposure to the dollar, not much obviously, because my investment is long-term, another reason is that just a penny from Xi Jinping and things go back to normal, but via doubts, a small part of this year's earnings will be dollarized via increased market risk. Let's hope the Chinese government does the right thing…

Finally, this is not an investment recommendation, make your own decisions and feel free to comment on this text.

That's all folks!

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Written by   69
1 month ago
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