LAST week, the Chinese real estate giant Evergrande filed for bankruptcy protection in the US. This took place while another Chinese real estate giant, Country Garden, was having its own problems.
China’s real estate issues arose shortly after Beijing implemented the “Three Red Lines” rule which basically forbade real estate companies from overleveraging (over-borrowing) themselves.
Unfortunately for the Chinese economy, being in debt played a big role in these companies, which is why the Chinese real estate sector is having so many big problems right now.
The situation has become so bad that the People’s Republic of China (PRC) has even put a moratorium on the construction of skyscrapers (except under special circumstances).
However, what is happening now in China is not unique to it, nor can it be attributed to the PRC’s political and economic system. Japan has had a similar problem in the past, and the Japanese malinvestment led to the Lost Decade, a multi-decade period where the Japanese economy had to pay for its bad investments with stagnant growth. Essentially, they had to pay back bad debt through present and future growth.
There is a lesson here, especially now that a lot of capital is heading to Southeast Asia: Good investments are those that offer good return on capital. What China and Japan did was to rely on an investment-led system to capture market share at the expense of profitability. This system worked in the short term, but eventually the investments required return-on-capital.
When investments don’t offer returns, you have what is going on in China now and what happened in Japan in the ‘80s: Economic Downturns.
So assuming that the Philippines gets the attention of investors, it’s important that we don’t use debt to fuel to grow certain sectors. When making investments, it’s important to temper greed with fear./PN
