Key Summary
- High-level economic dialogue between US and China aims to address divisive issues impacting their economies.
- China’s liquidation of Evergrande Group highlights financial instability and the need for global economic cooperation.
- Real estate market collapse in China poses significant challenges, leading to a crisis of confidence and international economic repercussions.
- US-China reconciliation efforts focus on addressing debt burdens, subsidies, and overcapacity, with potential short-term solutions such as tariff adjustments.
- Despite longstanding tensions, a positive economic relationship between the US and China is crucial for global economic stability and better trade relations with allied countries.
Both top United States and Chinese officials met in Beijing to discuss issues dividing the two economies. This dialogue between the two countries comes as China just liquidated $300 billion worth of Evergrande Group, after it defaulted on interest payments on bonds on December 9th, 2023. It also comes as the Presidential race heats up in the United States, applying more pressure on President Biden to mitigate effects on the United States economy from these exogenous factors. The United States and China make up 43.9% of the global economy, making this re-engagement on the economic front necessary to the global economy’s health. The Chinese property sector is not only a major financial stressor for China and its citizens, but is expected to send rippling effects across the world.
The collapse of China’s real estate market began similarly to the 2008 great recession. Investor confidence in the real estate market was extremely high with large trust firms like Citic raising money for real estate company Sunac. Returns on investment were soaring with Sunac’s developments, but the investment risks were more dangerous as project developers like Sunac relied on trust firms investing in businesses that were too risky for banks. The lack of regulation over mandating public disclosure of trust firm operations allowed Citic to put on a euphoric veil, pretending that the risks were minimal and that investments were protected.
This initial investor exuberance led to a large increase in speculative investment. This increase in borrowing led to cash problems, where Beijing policymakers aimed to limit this financing and borrowing levels which resulted in Sunac halting the development of their residential and commercial projects. In the case of the Evergrande Group, investor confidence has plummeted, leading to property developers defaulting and missing loan payment dates. With nosediving housing investments, commercial and real estate development has fallen nearly 10% in the last year. This drastic loss in confidence and debt accumulation resulted in Beijing mandating that Evergrande Group liquidate their company.
This crash in the real estate sector is effectively a crises of confidence. Financial markets rely on investor confidence in order to maintain levels of trust in investment between lenders and borrowers. When this confidence evaporates investment firms are stuck with investments that are not easily liquidated, leading to a lack of cash. Chinese owned international holdings firms were left scrambling to liquidate their properties overseas, effectively driving prices down. Chinese economists are left scrambling trying to generate solutions to encourage foreign direct investment as their overall levels have plummeted with the financial markets collapsing.
China’s ailing economy marks an uneasy and unknowable future for the global economy. There have been instances of Chinese holdings firms offloading properties in foreign countries for super discounted prices. With a falling Yuan, only stabilized by the Central Bank of the People’s Republic of China, its forecasted that foreign direct investment will remain at current low levels. These effects have been felt across banking institutions such as Lazard, Rothschild, and Bank of America which have announced closures and job cuts. These are seen as international investment banks have recorded tumbles of nearly 30% in equities from Chinese clients.
The United States and China have a unique opportunity to reconcile political and economic tensions that have plagued the two nations relationship. During the meeting between top United States and Chinese economists and officials, discussions revolved around sovereign debt burdens, unfair subsidies, and overcapacity in poor countries. Further dialogue will continue in April with the hopes for economic and financial cooperation. In the meantime the United States should continue to communicate intentions of cooperation with Beijing, while encouraging China to lessen their subsidies in various companies. A short term solution could involve the United States lowering tariffs and sanctions in order to help prop up Chinese foreign direct investment. However, this measure could cause China to encourage investment into microchips which could allow them to expand military operations. Therefore, if the United States decided to lower tariffs and sanctions, it should maintain high levels of tariffs on microchip and technology investment.
Despite long term tensions between the United States and China, the global economy relies on the strength of these markets. The United States and China have also been major trade partners of each other despite their political disagreements and economic trade wars. A reconciled relationship between the two global hegemony’s of the global economy could not only generate better political outcomes but could encourage better trade relations with allied countries as well. If the Biden administration prioritizes communication with Beijing through continued interactions with the Economic and Financial Working Groups, a positive political and economic trade and investment policy between the United States and China is possible.
Author: Tucker Henry
