Kelly McParland: Canada has an Evergrande economy

, Kelly McParland: Canada has an Evergrande economy, Nzuchi Times National News

After borrowing billions more than it could afford, the Chinese real estate giant is in deep trouble. Like it, Canada also seems immune to the virus of financial reality

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The idea behind China’s Evergrande real estate empire was that no amount of borrowing was too great, as long as you poured it into investments that produced a return sufficient to cover the borrowing costs.

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Evergrande didn’t indulge solely in housing projects, though that was its main focus. Buoyed by its seeming success as a developer, it expanded into theme parks, auto manufacturing, health care, retirement homes, sports teams, life insurance and bottled water, among other interests. The idea was the same: borrow as much as it takes, but keep making the payments. As long as the payments stay ahead of the borrowing, everything is fine.

If that philosophy sounds vaguely familiar, it should: it’s the same one Canada’s government follows in managing the national finances. As Finance Minister Chrystia Freeland has made clear, Canada’s government believes it “can’t afford not to” push the country deeper into debt in pursuit of the ambitious goals the Liberals hold for increased benefits and services. Pharmacare, daycare, eldercare … they’re all expensive “investments,” as Ottawa likes to term them, and a country that is already more than $1 trillion in debt doesn’t have the resources to pony up for them from available cash. So, keep up the borrowing, and hope enough money rolls in from increased productivity to cover the costs.

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The idea was that no amount of borrowing was too great

Evergrande had the same idea. Unfortunately, as the world has become aware, things didn’t quite work out as intended. The company now has more than US$300 billion in liabilities and is struggling to make payments. It missed an US$83.5 million payment a week ago, plus US$47.5 million due a few days later, and is now in the midst of a 30-day grace period as it searches for a route out of the mess, with considerable involvement of the Chinese government. A default would be a national embarrassment of the sort the Communist bosses in Beijing detest, as it undermines their argument that the state can run an economy via political dictates and five-year plans overseen by all-knowing party officials with a magic formula for never-ending growth.

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Convinced China’s hunger for housing was bottomless, Evergrande erected massive communities of highrises for buyers seeking homes and investment properties. Buying in required extensive borrowing by the buyers as well as the sellers, creating a double-barrelled world of debt, both of which depended on nothing untoward coming along to upset the delicate balance. But something always does — even in a strictly-controlled communist regime — and the building mania is now threatening China’s economy as a whole, and the global economy by extension as the impact ripples through other countries that have built extensive investment links tying them to China’s fortunes.

It’s bad news indeed, especially given other events going on in China that have increased the uncertainty: a state crackdown on high-profile entrepreneurs like Ant Group’s Jack Ma; an energy crisis that has two-thirds of the country rationing power, factories shutting their doors and families coping with rolling blackouts; and more overt efforts by the U.S. to counter Chinese influence, which has Washington considering creation of an international public works scheme to rival Beijing’s aggressive Belt and Road program. Even the optics are increasingly troublesome: real estate holdings represent an estimated 70 per cent of the wealth of Chinese homeowners and almost 30 per cent of China’s GDP, but the sector is so overbuilt that the country is blowing up buildings that have sat empty for years.

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Maybe blind optimism is contagious, as Canadians appear to have contracted a similar virus in relentlessly pushing up the cost of homes in the apparent belief demand will remain forever impervious to whatever level of debt is involved in obtaining their corner of real estate heaven. Plenty of warnings have been issued about the dangers involved. Just last week the Canada Mortgage and Housing Corp issued a stark alert, signalling “high vulnerability at the national level.”

, Kelly McParland: Canada has an Evergrande economy, Nzuchi Times National News

“Exceptionally strong demand and home price appreciation over the course of the pandemic may have contributed to irrational expectations of continued price growth and, in turn, more buyers entering the market than was warranted,” it said.

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Interest rates are set to rise, inflation is becoming a concern,  and Canada is still battling COVID outbreaks in many parts of the country. Yet Liberals in the recent election stressed a “bold and ambitious” spending program supported by more borrowing, including a housing pledge that — far from making homeownership more affordable — is likely to encourage even greater debt accumulation while driving prices even higher. The Liberal plan would make it cheaper and easier to get mortgage insurance for high-priced homes, which can only stimulate demand while raising the floor under prices. Other Liberal tax pledges would make it easier for buyers to scrape together the money to take the plunge, which, again, would do nothing to encourage prudence or bring prices back to more reasonable levels.

It’s a strategy fuelled by blind optimism and a wilful refusal to accept that the world can upset the applecart of even the most determined idealists. Evergrande wanted to built an empire and ended up dynamiting buildings while pleading for debt relief. Canada’s newly re-elected government is still pretending it can’t happen here, presumably because we’re immune to the virus of financial reality.

National Post

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