In 2013, Xi Jinping cheered global investors like few Chinese presidents before him with pledges to let market forces play a "decisive role" in decision-making.
Between then and 2018, progress in weaning the economy off exports and getting the state out of industry was slow, but steady enough to keep the bulls charging. But then U.S. President Donald Trump's trade war arrived, prompting Beijing to shelve structural retooling efforts in favor of new stimulus.
Recent corporate news offers a glimpse into just how much stimulus -- and the extent to which China is putting the quantity of growth ahead economic quality.
No one company can ever perfectly represent a nation's economic situation, but China Evergrande Group comes pretty darn close. China's third-largest property developer by sales, is also its most indebted. It dominates a vital industry that is slowing and yet manages to skirt government efforts to curb runaway borrowing. Evergrande, it follows, is a microcosm of the risks of loading up on debt at a most inopportune moment.
Beijing displays a particular intolerance for real estate tumult. Time and again, the modern Communist Party churned fresh credit into the market to stabilize prices. It started in 2008 amid the Lehman Brothers crisis. It happened again in 2014 and 2015. Investors have every reason to expect Xi will open the spigot anew.
The intensifying trade war has Xi engaging further in this moral hazard. Exports to the U.S. fell 6% in July from a year earlier to $38.8 billion. Trump's tariffs catalyzed a chain reaction of sliding industrial production and waning business confidence. The slowest growth in 27 years in the second quarter was no aberration.
Not surprisingly, Xi's party is sticking to what it knows: prop up property values at all cost.
Those costs are rising fast. In the decade to 2018, when the U.S. president launched his trade war, Beijing's post-Lehman crisis stimulus binge drove public and corporate debt to the $34 trillion mark. The opacity inherent to China Inc. makes it anyone's guess what that number might be today, never mind in 2020.
Yet the bill for China's 11-year borrowing binge is swelling and increasing its risk profile. Every industrializing nation experiences a "Minsky moment," when a debt-fueled boom meets a nasty end. Think Japan in the 1980s, Southeast Asia and Russia in the 1990s, Wall Street in the 2000s and Europe since then.
China will not avoid a reckoning, no matter how smart, determined and seemingly omnipotent Xi's men may appear. And the debt blowout since 2008 will make Beijing's comeuppance bigger and more spectacular globally than ever needed to be the case.
News from the property sector demonstrates why. Despite Xi's mantra that housing is for domiciling, not financial mania, China has about 65 million empty apartments already. The glut has Team Xi pressuring banks to reduce home loans and companies in general to reduce debt-to-equity ratios.
Evergrande is now in the headlines for all the wrong reasons. Shares are down 36% this year, the worst performer among Chinese developers listed in Hong Kong. Its bonds are falling, too, as a 45% fall in profit in the first six months of 2019 has markets worried about its $114 billion of debt. That is debt greater than the annual gross domestic product of Ecuador.
But this is just the tip of the proverbial iceberg. If growth drops below the 6.2% second-quarter rate, Beijing has a choice: continue tightening the vice on homebuilders to deleverage the economy, as Xi pledged in 2013, or support the market.
Under Xi, China has not shown great tolerance for headline-grabbing defaults. Yet letting reckless borrowers miss bond payments -- or fail altogether -- is part of any economy's maturation process, particularly considering that China is the world's second-largest financial power.
Granted, Trump's trade war is a challenge Xi's party hardly needs. On September 1, Trump's administration began collecting 15% taxes on another $125 billion of Chinese goods. Trump also threatens a 25% levy on imports of all cars and auto parts, further upending the supply chains on which China relies.
All this augurs poorly for the assertive reform process Xi has advertised since 2013. A weaker yuan, meantime, poses its own risks. While a plus for exporters, it is a rising threat to property developers. According to Moody's Investors Service, a quarter of their total debt is denominated in foreign currencies, up from 20% in June 2018.
Myriad other mainland companies reliant on property face a challenging 12 months. China State Construction, to name just one, has $72.3 billion of debt. The industry's ambitions, and its current debt troubles, reveal a bigger story about the strains imperiling China's trajectory. It is not a comforting story.
The odds favor Beijing stepping up yet again to reward the risky behavior of China's biggest developers. Xi would be better off, though, internalizing his 2013 pledge to give markets a chance.
William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades."