The fragilities of China and the ‘bosses’ of the Ibex

The Bank of Peking surprised this week with a drop in the reference interest rates of one-year loans, to counter-current of the rest of the central banks of the planet, after a few weeks ago it reduced the coefficient of mandatory reserves for financial institutions by half a point to stimulate their economy. On Monday, the stock markets of half the world were scared. The trading floors of both Shanghai and Hong Kong closed with a collapse, which reverberated in the rest of the Asian markets, with falls close to two percent. Do youThe Chinese economy is so bad?

The most logical answer would be that there is fear that the Omicron will crash the activity, as it happened with the previous variants of the virus, Alpha, Beta or Delta. The Chinese authorities are also blunt in this regard. Last week cobalt rose more than 30 percent because several of the mines were closed due to the appearance of a few infected among their workers.

The zero tolerance policy with Covid, together with the reopening of the economies of Southeast Asia, are two of the causes of the supply bottlenecks, which causes the cost of freight to have multiplied by ten with the derivatives on consumer prices.

This Wednesday, the city of Xian tightened restrictions on the mobility of its about 13 million inhabitants. It reduced public transport to practically zero, flights from its airport and restored police controls on the roads. The culprits were 43 travelers with Covid on a flight from Pakistan

There are additional reasons for concern. Its currency, the yuan, is at record levels, thanks precisely to the strength of exports at the end of the crisis. The Bank of Beijing intervened a few days ago to deflate its price. But the most worrying factor is the real estate. Evergrande’s bankruptcy filing is the tip of the iceberg of a much deeper problem, which the Chinese authorities have not resolved for years: the hidden indebtedness of many companies and, above all, of regional governments, which to add insult to injury have acquired land at high prices to try to avoid the bankruptcy of local real estate companies and they cannot sell the land they have, one of their main sources of financing. In our country we have a similar example with Sareb, the public bank drowned by debt incurred in acquiring the damaged assets of real estate and savings banks during the Great Recession.

The province of Guizhou is among the poorest and most indebted in China. Headquarters of Kweichow Moutai Liquor Company, one of the most valued companies on the Shanghai Stock Exchange, He had to receive a loan to finance his current expenses from this public company, in which he has a relevant participation. The regional government barely pays off its commitments, among other things because it has a dozen highly indebted investment vehicles, which in recent months have led the bids for the acquisition of local land, in an attempt to raise the income of real estate companies . Analysts warn of the risk of contagion to public spending and, therefore, to the growth of the region.

Nanyang is a city of about ten million inhabitants, located in the center of the country, which in recent years has received waves of immigrants from rural areas, where real estate companies like Evergrande and Country Graden made their fortune. The average price of real estate falls between 30 and 40 percent and sales offices face queues of buyers demanding their money back.

The The central government has been taking measures to limit loans to developers and toughen loan conditions to fulfill Chinese Prime Minister Xi Jingping’s mandate that “houses are for living and not for speculating.” But these liquidity restrictions, together with the price falls, only aggravate the situation of the real estate sector.

Sales of the top 100 developers fell 36.2 percent in September, after dropping 20.7 percent in August, according to the latest official data. September and October are usually the best sales months.

The cooling of the real estate sector relaunches the debate among economists on if Beijing’s easing of monetary policy tries to avoid a severe blow to its economy. The head for Asia of ‘Oxford Economic’, Louis Kuijs, warns that the real estate slowdown may reduce the growth rate from an estimated 5 percent to just 3.6 percent. Nomura does not dare to give a percentage, but he does warn of the damage that can be caused by a sector that alone represents 14 percent of GDP and would reach up to 20 percent with indirect services.

In November, mortgages register a certain relief, which leads many analysts to think that the peak of the crisis will be reached this Christmas. Nomura estimates that sales fell 10 percent this year and 5-10 percent next year, and prices about a third. Oxford Analitics predicts that the authorities will have to continue easing their monetary policy to ease the crisis. In addition, some regional governments, such as that of Heilongjiang province, are beginning to announce initiatives to alleviate the sector. Organize online campaigns to help developers sell while providing grants to citizens interested in buying homes.

Nevertheless, With the new Omicron variant, the concern about the state of the Asian giant’s economy is understandable. Beijing’s zero tolerance policy did not prevent the China’s total debt (non-financial companies, plus households, plus government) is around 300 percent of GDP, according to CaixaBank. A percentage very similar to western economies, with greater liquidity, but far from emerging ones. A similar country like India supports a debt of 140 percent, half. Some analysts also warn of the risk that the end of globalization will penalize Chinese industry and exports in the coming years.

The 19th Central Committee of the Chinese Communist Party held in November consecrated Xi Jinping as absolute leader and renewed his mandate for the third time with the mission that the country becomes the first economic superpower in 2050. Until then, there are many improvements to implement and many crises will have to be faced. The real estate is one of them.

The same ambition of command and control is observed in other parts of the planet. The fight uncovered this week at Merlin Properties to replace its CEO, Ismael Clemente, shows the existence of an internal governance problem. Shareholders learned in extremis of the tensions between the company’s management and the non-executive president, Javier García-Carranza.

A few weeks ago, Inditex shareholders were surprised by the replacement of Pablo Isla by Marta Ortega. A Copernican turn in the route plan marked up to that moment. IBEX companies lack governance plans. Most do not even have an inheritance program in place in the event that the chief executive had to be replaced by a case of force majeure. Like Xi Jingping, they have duties.

PD.-In the absence of knowing more details about the labor reform, This will mean a reduction in competitiveness for companies by reinstating collective agreements to raise wages or the extractiveness, which caused so many headaches with inflation in the last great crisis. In general, the main milestones of the 2012 reform are maintained as fundamental aspects such as dismissal are not touched. But there is a lack of proposals that favor companies, as they remain in the inkwell issues such as high absenteeism.

In these circumstances, the businessmen of Madrid and Catalonia abstained, which is like saying no. In addition, from the automobile and field employers, which requires specific treatment. Greater ambition on the part of the CEOE would have been necessary. Merry Christmas!