Global Economy Engulfed in Information War

As any reader will recognize the world is in dangerous economic waters. Ever since the start of the Covid-19 pandemic both governments and central banks have responded with unprecedented monetary easing. In other words, we are seeing debt at historically high levels for governments, businesses as well as households. The effects have recently become very clear. Housing costs have gone through the roof for some time now and more recently the cost of gasoline, natural gas and energy in general has reached new dizzying heights. The only solution seems to be a reversal to the normal situation: a decrease in quantitative easing and an increase in interest rates. However, any moves in this direction will upset global markets. The last thing the world needs is another shock. Sadly this shock has materialized in September in the Chinese housing market. The fact that this has not yet had a serious impact on global markets can only be attributed to a coordinated spin war to downplay the problem.

So first things first, what is going on? Recent decades saw a tremendous growth of the Chinese economy: an enormous success from a financial and human development point of view. However, the growth has led to imbalances in the Chinese economy. Expecting that the double digit growth figures would continue indefinitely many Chinese chose to invest their savings in real estate. The growth of the real estate sector was so unreasonable that it grew up to 30% of Chinese GDP. The Chinese government recognized the danger and decided to crack down on irresponsible borrowing. Sadly the government has been too late as it became clear in September that Evergrande, China’s second largest property developer, was teetering on the brink of bankruptcy. Its debt load is 300 billion USD. To put that into perspective: similar to the GDP of Finland. In September I already mentioned the problem in a podcast.

In a follow-up in late October I stated that the problem was far wider than Evergrande alone. Multiple Evergrande suppliers have folded and its competitors are also in trouble. This is not a risk of default of one company, it is a risk of default of the entire Chinese real estate market. Markets were calmed however as Evergrande did manage to avoid default by paying interest on its loans multiple times during October. Although these payments managed to prevent a market rout, it turns out there is no proof that these payments have been made.

Last week AsiaMarkets reported on an interview in German carried out with analyst Marco Metzler. Mr. Metzler stated that there has been zero proof of any bond payments being made by Evergrande. In fact, the whole story rests on one anonymous source of the New York Times. I have reached out to the New York Times to ask them to either confirm or deny this claim, but as of yet there has been no response.

It is unclear who is leading the downplaying of the Evergrande conundrum, it is clear however that a structured collapse of the company is in the interest of anyone invested in the status quo. Favorable news coverage has proven to be a crucial tool in keeping markets afloat. The Chinese government is fully aware of the need to influence public opinion through the established media. It should come as no surprise that the Chinese government pays Western media millions in exchange for stories friendly to the Chinese Communist Party. What could surprise you is that these payments also flow to some of the most trusted news sources, including the Washington Post and The Wall Street Journal.