China’s Evergrande has been staring bankruptcy in the face since 2021. More recently, media members have fingered Country Garden as yet another large China property company that could fall. Supposedly this signals “crisis” for China. Not explained is why.
How easily we forget that not too many decades ago there was realistically no failure in China. There was just misery. Businesses couldn’t go under, but precisely because they couldn’t fail they also couldn’t succeed.
In the U.S., few Americans like dealing with government-run entities. What’s insulated from market realities is allowed to stagnate, or remain in the stationary state. What’s not evolving is a sitting duck in the competitive marketplace.
Yet it’s supposedly a crisis that two very large Chinese property companies might go under? Why once again? Failure doesn’t signal disappearance. In reality, failure signals the release of precious human and physical capital from poor stewards of same. It also signals a fire sale of underutilized assets (hence the failure) by poor stewards of same. Far from a crisis, such a scenario signals rebirth, or growth, or most crucially recovery on the way.
To suggest otherwise is to suggest that economies gain strength from the perpetuation of that which isn’t prospering. It’s the NFL equivalent of extending the head-coaching contracts of perennial losers. Nothing could be more at odds with reality than providing endless "lives" to the incompetent.
The reality is that the bigger the bankruptcy, the bigger the opportunity for subsequent growth. Figure that if the corner store goes under, there’s very little for intrepid investors and managers to run more skillfully. But if it’s a big corporation that’s no longer operating in capital-enticing fashion, think of all the resources that will find their way to newer, more capable hands.
Notable here is that at Oaktree Capital, a U.S.-based distressed debt giant, they actually create funds during the good times that will put precious capital to work during the bad times. This is of a piece with Oaktree co-founder Howard Marks’s assertion that the seeds of decline are planted during the good times, and the seeds of recovery planted during the bad times. Oaktree is part of the recovery. When times are bad, it’s there with billions in hand to move precious human and physical capital to higher, more remunerative uses.
Bringing it back to China, we’re told yet again that some of its biggest real estate companies are in trouble, or may be in trouble. Supposedly if they fail China’s economy will flatline. Except that such a scenario is impossible. How could it hurt China’s economy if poorly managed corporations are forced to hand over precious resources to more capable managers? If the question reads as flippant, that’s because it is.
Lest we forget, in the 20th century all manner of countries (including China) tried collectivism whereby no one could fail. The results were murderously awful. No surprise there. What’s surprising is that pundits and economists in the free world would pretend that China’s economic outlook would improve if a truncated version of what failed so tragically in the past were re-instituted via bailouts. What a backwards point-of-view.
What fails in total (central planning) doesn’t attain majesty if used in limited fashion. More realistically, economies gain essential strength from periods of weakness that result in the bad to mediocre being replaced by the good to great.
Looking back to the early part of the 21st century, AOL and Yahoo were the bluest of internet blue chips. Now they’re largely forgotten. How economically crippling if government propped up the past. By extension, how economically crippling for China if Evergrande and Country Garden are saved.