Things are not looking good.
China still holds the key.
The fortunes of the global economy this year still largely swing on how good a job it does navigating itself out of its current mess.
So far things aren't looking great.
On Tuesday we learned that the biggest property developer in China has been finally ordered into liquidation. From the AFR:
China Evergrande Group, the property developer at the centre of China’s real estate crisis, will be broken up and liquidated under a Hong Kong court order, in a move which has sent shockwaves through the country’s financial system and could ultimately weaken demand for Australian exports.
While Evergrande has a limited presence in Australia, the impact of the forced sale of assets and debt default on China’s beleaguered property sector and the broader economy had been identified by the Reserve Bank of Australia as a risk to Chinese demand for Australian goods and services.
Hong Kong’s High Court on Monday ordered Evergrande to be liquidated, dashing hopes Beijing might still bail out what was once the country’s biggest property developer. It also ended nearly two years of failed negotiations with creditors to find a solution.
Yeah, we'll see. The liquidation order still needs to be recognised in mainland China, and it's not clear to me that the Chinese government will let a national champion go down in a ball of flames like this.
But it is symptomatic of the woes that China is facing.
Property prices continue to slide, making the sector effectively uninvestable.
But with property prices falling, China risks falling into debt deflation.
Debt deflation, as described originally by Stanley Fisher in 1933, refers to a situation in which the overall level of prices in an economy falls, leading to a decrease in the value of assets and an increase in the real burden of debt.
You get a vicious cycle where falling prices or deflation exacerbate the economic challenges associated with high levels of debt.
Debt deflation usually goes hand in hand with the property sector bust.
And it is true the prices in China already seem to be falling.
And investors are seeing the writing on the wall and are starting to get nervous. Spurred on by the decoupling driven by Western powers, investors are selling out of the Chinese stock market.
But this is happening while other Asian stock markets are doing quite well. This chart here shows the difference between Japan and China.
So look, China is a big country and its people are resourceful.
But make no mistake, it has its challenges cut out for it this year.
JG.