The Economist - USA (2021-11-13)

18 Leaders TheEconomistNovember13th 2021

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cares abouttoxicdebtareanever­presentfeatureofChina’s

economy. The latest involves Evergrande, a troubleddevelop­

er that threatens to cripple the property sector. Thefirmalsohas

tentacles  that  reach  into  the  darkest  corners  oftheChinesefi­

nancial  system,  wrapping  around  banks  and  shadowlenders.

Yet even as Evergrande catches the eye, another riskisemerging:

crony capitalism at smaller banks. 

A government crackdown on leverage in propertyhaspushed

Evergrande  to  the  brink  of  collapse.  Other  largedevelopersare

weighed down by $5trn of debts. Speculation is swirlingthatone

of them, Kaisa, is also struggling to make payments(ithasasked

investors for “time and patience”). The turmoil mayintensifyas

more debts come due. According to Nomura, a

Japanese  bank,  the  property  industry  must  re­

pay $20bn of offshore bonds in the first quarter

of 2022, twice the level of this quarter.

Foreign  investors  have  been  quick  to  grasp

the  risks.  The  yield  on  Chinese  junk  dollar­

bonds  has  reached  a  crippling  24%,  shutting

most  issuers  out  of  the  market.  Some  home­

buyers are holding off purchases, worried about

handing over deposits to weak firms. Building has stalled at ma­

ny of Evergrande’s 1,000 or more projects. 

It is unclear who is exposed to losses, and to what extent. Ma­

ny developers use shell companies, masking their debts, while

stockmarket regulators have allowed them to keep investors in

the dark. On November 8th the Federal Reserve warned that Chi­

na’s property troubles threaten the global economy. 

Losses  on  property  loans  will  hurt  the  banking  system,  al­

though by how much remains to be seen. But as we explain this

week  (see  Finance  &  economics  section),  lenders  also  face  an­

other danger. Crony capitalism has flourished among the coun­

try’s small and mid­tier banks. Because the biggest state­owned

lendersprefertomakeloanstootherstatefirms,privatecom­

paniesandentrepreneurshaveboughtstakesinbanksinthe

hopeofgettingpreferentialaccesstocredit.

Althoughthebanksinvolvedareoftensmalltheyadduptoa

giantproblem.TheEconomistcalculatesthatupto20%ofthe

commercial­bankingsystemmayhavecloselinkswithtycoons

orprivatebusinesses.Therehavealreadybeenblow­ups.In 2019

thecollapseofa smalllendercauseda spikeininterbankbor­

rowingrates;severalmorefailureshavefollowed.Evergrande

wasuntilrecentlytheownerofa captivebankinnorth­eastChi­

naandissaidtobeunderinvestigationforsome100bnyuan

($15.7bn)inrelated­partydeals.

ForXiJinping,China’sleader,statecontrolis

theanswertoboththepropertyandbanking

threats.Tokeepbuildingsitestickingover,lo­

calgovernmentsaretakingcontrolofsomeun­

finishedprojects.Atsmallerbanksmanycor­

porateshareholdersarebeingforcedoutandre­

placedbylocal­governmentassetmanagers.

ThisrevealsthelimitationsofMrXi’seco­

nomic  philosophy.  The  expanding  reach  of

state control may prevent a full­blown panic, because it shows

that almost all banks are underwritten by the government. But it

fails to acknowledge an important truth about the economy. 

Many  of  the  distortions  that  plague  China’s  markets  were

created by rigid state control. In plenty of private firms, insider

dealing with lenders has been a way to cope with a state­domin­

ated banking system that discriminates against them. Mr Xi may

succeed in averting a sudden bad­debt crisis by reasserting state

authority. But his reluctance to be bound by rules, treat state and

private  firms  equally,  and  offer  predictability  to  investors  will

ensure  that  the  financial  systemisdoomed  to  suffer  yet  more

dangerous distortions in the future.n

Evergrande is not the onlyloomingdangerinthemainland’sfinancialsystem

High-yield dollar-bond spread

China, percentage points

20

10

0

19182017 2120

China’s other debt problem

Evergrande and financial contagion

O

n november 8 ththe  World  Food  Programme  (wfp),  a  un

agency,  said  that  its  estimate  of  people  “teetering  on  the

edge of famine” worldwide had risen from 42m earlier this year

to  45m.  Remarkably,  just  one  country  accounts  for  almost  all

those  3m  additional  people.  Afghanistan  is  on  the  brink  of  a

humanitarian catastrophe. 

Some 23m Afghans, in a country of 38m, face acute hunger. Of

those, 8.7m are in a state of emergency, the second­highest cat­

egory in the wfp’s hierarchy of calamity. The classification man­

ual explains that by the time the agency declares a famine, the

highest  category,  it  will  be  too  late  to  avert  the  worst  con­

sequences “because many will have died”.  

Many are dying already. More than 3m children are malnour­

ished. Locals report cases of entire families starving to death in

their  homes.  Hospital  wards  are  taking  in  emaciated  children,

including  11­year­olds  who  weigh  just  13kg.  Poor  Afghans  are

selling  their  remaining  possessions  for  food.  Some  are  selling

their daughters. The misery is as bad in the cities as it is in the

countryside. As the winter sets in, the agony will only deepen. 

Afghanistan’s condition was fragile even before the fall of the

capital, Kabul, in August. Long periods of below­average rainfall

and  above­average  temperatures  have  led  to  poor  harvests  and

high  prices.  After  decades  of  warfare,  around  4m  Afghans  are

refugees in their own country, with little means of support. 

The  Taliban  takeover  has  made  everything  worse.  Foreign

aid, which funded three­quarters of government spending, has

The world must act now to stop Afghans starving

War, drought, famine

Afghanistan