Where is China Going? By Bill Blain

Is China killing its own golden goose? The country is becoming increasingly opaque, so it’s hard to tell. From Bill Blain at morningporridge.com:

Evergrande will default, but the Chinese economy will probably avoid a property contagion crisis as the government becomes increasingly interventionist. Longer term, how will China evolve to cope with Covid, Growth and Demographics

“When the winds of change blow, some build walls while others build windmills..”

This morning – Evergrande will default, but the Chinese economy will probably avoid a property contagion crisis as the government becomes increasingly interventionist. Longer term, how will China evolve to cope with Covid, Growth and Demographics?

I’m going to go off on something of a tangent on China this morning.. It can hardly come as much of a surprise to markets that S&P says Evergrande’s default is “inevitable”. (One of my highly coveted No Sh*t Sherlock awards is on its way to the US debt rating firm for stating the downright bleeding obvious).

Evergrande’s quietus will be a step towards China’s managed deflation of its property bubble, and it’s got massive implications for current and future investors in the economy. Let me stress I don’t believe China’s economy is about to vanish in a cloud of evaporating property dreams, or that a social revolution is around the corner on deflating consumer expectations. But, change will occur.

I expect China will successfully avoid Evergrande contagion destabilising the economy, and manage a soft-landing, but there is fundamental shift underway – a slowing economy, lethargic growth, and a shift away from capitalism towards a more interventionist state-controlled economy is underway.

Growth expectations are now around 5% – far below numbers we assumed were deemed necessary by the party just a few years ago. Even that number could be under pressure as the scale of the property effect on the economy comes into play, while China’s isolationist response to Covid means the fast spreading Omicron variant could play havoc with reopening the economy.

The Thoughts of Chairman Xi now absolutely dominate and set the internal debate – begging the question: just how will China emerge from the immediate uncertainties of a Property Wobble, Covid and Geopolitical Tension, and the long-term question of how China fits into an evolving global economy?

And, all the time, hiding in the background is the demographic reality: can China get rich before its aging demographic leaves it struggling?

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