Should we fear the worst-case scenario of a new stock market crash? Michel Ruimy tempers: “The debt ratio in China is near the highest levels in the world. However, just because the debt ratio is the highest does not mean that it is an indicator of an impending crisis. see is that, as in Japan, Chinese debt is almost entirely domestic, so there is no inevitable break: as long as confidence remains, the cost of debt is bearable. Will this lead to a global crisis? It all depends on the Evergrande file“.
As a reminder, Evergrande is the Chinese real estate giant. After crazy growth for 25 years, bringing it to weigh a quarter of the country’s GDP, a period during which the population was able to support and finance its consumption on credit, there was a backlash. Banking on an ever stronger demand, constantly reinforcing the price of real estate, its debt is around 300 billion euros. Result: in one year, the shares of the company have collapsed by 85%.
A situation reminiscent of the bankruptcy of Lehman Brothers. “At the moment, there is no evidence that the company can repay all of its debts. The question is whether Evergrande is too big to go down and if it can take the whole economy down with it. We have to see if on its own, it will not trigger a financial crisis” warns the French economist. “But it is above all the way in which the Chinese government manages the file that can have consequences: in the event of poor management, there may be a loss of confidenceresulting in effects of contagion to other financial markets”.
The problem is not so much financial, but rather political according to Michel Ruimy. The challenge is multiple for Xi Jinping : he must break this loss of confidence towards the local banks towards the largest banks, but also manage his promise of housing to all his people while presenting a positive economic balance sheet to the Central Committee of the Communist Party for a future re-election. But with this bankruptcy, if his government fails to manage this problem, social tensions seem inevitable predicts the economist.