The problems in China’s economy are spreading

Earlier this week we learned that one of China’s largest real estate firms was on the verge of collapse. Country Garden, which is estimated to owe buyers as many as 1 million new apartments, is weeks away from defaulting on loans. Since then the situation has only gotten worse. Yesterday Evergrande, another property giant, filed for bankruptcy protection.

China’s heavily indebted property giant Evergrande Group on Thursday filed for Chapter 15 bankruptcy protection in a U.S. court…

The world’s most indebted property developer defaulted in 2021 and announced an offshore debt restructuring program in March. Trading of Evergrande shares have been suspended since March 2022…

In July, Evergrande posted a combined loss of $81 billion over the past two years, after struggling to finish projects and repay suppliers and lenders.

The real concern now is that problems in the real estate sector will spread to the rest of the economy. There are signs this week that may already be happening. A major Chinese trust which operates as a shadow bank has failed to make several payments.

Zhongrong Trust, which managed $87 billion worth of funds for corporate clients and wealthy individuals as of the end of 2022, is one of thousands of wealth management firms in China that offer relatively high levels of return to investors.

They are considered part of the “shadow banking” industry, a sector that forms an important source of finance in China…

About a dozen angry demonstrators were recorded chanting slogans and demanding payment related to investment products issued by the company, according to videos posted on social media app Douyin and WeChat…

One video posted on WeChat, which was later deleted, showed a man dressed in a red vest emblazoned with Zhongrong’s logo using a bullhorn to speak to the agitated group outside the company’s office.

“Let me explain. We can’t make any public announcement now,” he said. “The main reason is that we are still actively checking our underlying assets, and we are trying our best to recover the assets for you. Now if we disclose the underlying assets for a certain product, it might cause a dramatic shrinking of the assets. We can’t do this because this is being irresponsible.”

This even spurred a rare public protests in Beijing, though as you can see in this clip there were twice as many police as protesters demanding their money.

Any time people are protesting in China, you know the situation is very bad. In a police state any form of protest is liable to result in a visit from the police reminding you that public disruptions are grounds for arrest. And that’s exactly what happened this week.

Investors who put money into troubled financial giant Zhongzhi said security police had visited them at their homes this week, urging them to avoid public protests, Bloomberg reported. Investors who received the visits come from a wide area of China, including from Beijing…

For years, there have been protests by investors who have lost money in failed companies which are quickly shut down by police…

“There could be outbursts of discontent and street protests, but those would not be sufficient to present a lethal threat to the regime. Still, it looks like a slow but relentless (economic) deterioration,” Willy Lam, a senior fellow at The Jamestown Foundation, told AFR Weekend.

“If you use the metaphor of a cancer spreading. China is still a 10-foot tall giant, but the cancer cells are spreading. It will be a very messy situation.”

Xi Jinping’s stormtroopers can keep people off the street but he can’t control the anger that will build if this economic cancer continues to spread.

Update: This isn’t directly related but there is one part of China’s economy that is always profitable: The outright theft of material from foreign companies who are far ahead of Chinese competitors.

The National Counterintelligence and Security Center, the F.B.I. and the Air Force issued a new advisory to American companies Friday morning. The broad warning to industry said that foreign intelligence services could be targeting space firms, their employees and the contractors that serve those companies.

Space companies’ data and intellectual property could be at risk from attempts to break into computer networks, moles placed inside companies and foreign infiltration of the supply chain, officials said.

“Foreign intelligence entities recognize the importance of the commercial space industry to the U.S. economy and national security, including the growing dependence of critical infrastructure on space-based assets,” the Counterintelligence Center warning said. “They see U.S. space-related innovation and assets as potential threats as well as valuable opportunities to acquire vital technologies and expertise.”

In short, China would love to steal everything it can from Space X, Blue Origin and half a dozen other commercial spaceflight companies. How long can it possible be before China announces a reusable rocket that looks nearly identical to Space X’s Falcon 9?