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(AUSTRALIA) Evergrande Report: American author Mark Twain once said “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” as the property developer implodes #AceNewsDesk report

#AceNewsReport – Sept.27: As mega Chinese property developer Evergrande continues to implode, these words cut deep for an Australia that has bet the farm, the mine and vineyard on a strong Chinese economy. For years the expectation was that China’s economy would continue its multi-decade run of world beating growth, thereby supporting our own economy.

#AceDailyNews says according to reports ‘How China impacts Evergrande, ion ore and the Australias future by who is a freelance journalist and social commentator

Through international students, resource exports and the sale of homes to Chinese citizens, year by year Australia has become more and more reliant on Chinese capital and staying in Beijing’s good graces.

But as the fallout from the troubles of the Chinese property sector become increasingly evident, its clear that Australians may have to pay a penance for the nation’s failure to sufficiently diversify the economy.

The China Evergrande Centre in Hong Kong. Picture: Peter PARKS / AFP.
The China Evergrande Centre in Hong Kong. Picture: Peter PARKS / AFP.

But how did we get here, how did Beijing go from being relied upon for bailouts, to the Chinese Communist Party now allowing one of the world’s largest companies to careen toward default.

“There’s recognition the old build, build, build playbook does not work anymore & is actually getting dangerous,” CBB’s Miller tells @FT. Beijing cant wait any longer to change the growth model. I wont be surprised if a decade from now GDP growth is 1-2%”— China Beige Book (@ChinaBeigeBook) September 22, 2021

The world has changed

In the wake of the global financial crisis the Chinese government employed an enormous program of construction driven stimulus in order to support the economy. While the program was successful in its broader objectives, it has come to be seen by many within the halls of power as going too far.

Yet despite these concerns, the construction driven growth model continued and became even more relied upon. Chinese leaders such as former President Hu Jintao repeatedly reiterated the importance of rebalancing the economy away from construction and toward a more consumer led model, but it was not to be.

A housing complex by Chinese property developer Evergrande in Guangzhou, China's southern Guangdong province. Picture: Noel Celis / AFP.
A housing complex by Chinese property developer Evergrande in Guangzhou, China’s southern Guangdong province. Picture: Noel Celis / AFP.

As the Covid-19 pandemic continues to impact China, Beijing’s priorities have seemingly changed significantly.

With around one in six urban Chinese youth’s (aged 16-24) unemployed and millions of small business owners doing it tough, the idea of spending an enormous sum of money to bailout offshore investors and wealthy domestic bond holders would likely go down like a lead balloon.

That’s not to say that some form of rescue won’t come, it almost certainlywill at some point.

With 1.4 million homes slated to be completed by Evergrande for property buyers and more than 3.8 million people directly or indirectly employed by the giant, it will likely not be allowed to just fall in a heap.

Instead a restructuring that protects property buyers, retail investors and suppliers is likely, allowing President Xi Jinping an opportunity to show the Chinese people the CCP has their interests at heart.

The Chinese Communist Party’s power

As the unequal nature of China’s economic recovery becomes increasingly apparent, the central government has seemingly been looking for ways to prove to its people that they are its number one priority.

Where once a simple a share of the spoils of China’s rapidly growing economy was enough, as growth becomes more concentrated in selected industries and locales, it has become a much more challenging prospect for Beijing.

Prior to the pandemic this was already a brewing issue, as President Xi attempted to stamp his place in China’s history books alongside Mao.

In the wake of the pandemic, this is now being done with a great deal more urgency and fervour. From limiting the amount of time young Chinese can spend on TikTok per day to reining in the power of China’s tech giants, Beijing is attempting to make its case that it is a strong force for the betterment of Chinese society.

Chinese President Xi Jinping during the celebration marking the 100th founding anniversary of the Chinese Communist Party on July 1, 2021 in Beijing, China. PIC: Reuters
Chinese President Xi Jinping during the celebration marking the 100th founding anniversary of the Chinese Communist Party on July 1, 2021 in Beijing, China. PIC: Reuters

As an individual who was heavily impacted by Mao’s ‘Cultural Revolution’ in his adolescence, President Xi is acutely aware of how important maintaining broader social stability is.

While markets and some wealthy Chinese may want to continue with the never ending bailouts, Xi is seemingly taking another course. A route in which the people are the primary focus and if asset holders get burned, it may be all the better for his credibility for his push for “common prosperity”. 

The potential impact on Australia

According to an analysis from Goldman Sachs on the impact of Evergrande’s woes on the property sector, Chinese GDP is expected to fall by between 1.4 per cent and 4.1 per cent.

Goldman’s 3 scenarios for China’s property market in 2022— zerohedge (@zerohedge) September 19, 2021

Not fantastic news for an Aussie economy that catches a cold when China sneezes (no Covid pun intended). But perhaps more concerningly, new Chinese housing starts are expected to drop by between 15 per cent and 30 per cent during 2022.

While the current crop of projects is likely to keep iron ore demand relatively stable for a time, on a longer term time horizon the impact on the Aussie economy becomes more clear.

If these scenarios were to be realised, Chinese iron ore consumption could drop by between 6 per cent and 12 per cent as the current crop of projects is completed. While these numbers sound relatively innocuous on paper, in reality it could tip the balance of supply and demand quite significantly.

Since iron ore prices peaked at almost $US240 ($A331) per ton back in May, cuts in Chinese steel production have already driven prices down by almost 60 per cent, to sit briefly below $US100 ($A138) per ton.

While the federal budget conservatively based its estimates on iron ore prices sitting at just $US55 ($A76) per ton, it did not anticipate any further significant impact from lockdowns and virus restrictions.

Prior to parts of Australia heading back into lockdown, it was looking like the enormous iron ore price windfall could help the Treasury plug some of the holes in the budget.

But with more than 11 million Australians in lockdown and the iron ore price less than half what it was in June, the likelihood of the Morrison government or its successor having to make tough budget choices after the election has risen substantially.

For years Australians have ridden the Chinese property boom gravy train, with many believing that it would continue for decades to come. But to paraphrase Mark Twain’s famous quote, it wasn’t what we didn’t know that got us into trouble, it was we thought we knew for sure but just wasn’t so.

#AceNewsDesk report ………..Published: Sept.27: 2021:

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