There was a time when trouble in American economy created ripples in the European and South-East Asian markets, and then impacted others indirectly. It seems that China, the second largest economy after the United States in the world, where economy-watchers worldwide are forced to take note of market crisis in the Chinese economy.

The Chinese realtor, Evergrande, the biggest firm, is on the brink of default. It has failed to make interest payments of US$85.3 million on Thursday, especially to the company’s overseas bondholders. And it might not pay another round of interest, US$47 million next week. Evergrande’s debt totals US$305 billion, of which US$20 billion is owed to offshore shareholders. If Evergrande falls, then it might shake the Chinese economy and it would affect the domestic investors much more sharply than it will to the foreign investors. But the impact on American and South-Asian markets would be one of market sentiment, which is a crucial factor in the markets. It is reckoned that 40 per cent of Chinese domestic economy is in construction. That is why, the sustainability of Evergrande becomes such a crucial issue.

Critics outside of China have always been suspicious of the vibrancy of China’s market economy because the workings of the market are not transparent enough for outsiders to take a measure of the issues at stake. China has worked on big things. Its banks were big. Its companies were big. Many of them global brands like Ali Baba. But China has made itself the indispensable manufacturing hub because of cheap wages and efficiency. And it had also developed the ability to deliver supplies at gargantuan levels. The cheap costs of Chinese manufacturing were also dependent on the bulk orders it could deliver. For example, in the wake of the outbreak of COVID-19, China managed to manufacture and supply masks and ventilators to Europe in a trans-Asian train system originating in Beijing.

It seemed that the Chinese leaders have mastered the secrets of success of capitalism. But it seems they have not reckoned with the vulnerabilities of the capitalist system. There are the boom-bust cycles and the system always bounced back. But China has seemed to buck the trend until recently because it was not an open economy though it was capitalist. Evergrande seems to be testing the immunity of China to the vicissitudes of the capitalist economy. The company has borrowed more than it can repay. That is ambition outran caution.

According to reports, the People’s Bank of China has injected US$42 billion cash into the bank system and it is believed that this could imply that the government may intervene and avert a collapse. Evergrande has a 30-day grace period for making the payments, and this could be used as a window of opportunity to work out a salvage operation. But the Evergrande case shows the general symptoms of risk at work.

There is speculation which is not related to the actual demand and the actual asset value. The assumption behind allowing the valuation to soar high is that there will be a future surge that would justify the speculation in the present.

The Chinese government has of late been focused on market regulation, but it had more to do with the flow of unchecked information on the digital platforms and in the social media, and less to do with financial regulation. It would perhaps be necessary for the Chinese to pay attention to creating norms of fiscal prudence which are so necessary to keep the functioning of the markets on an even keel. China has benefited from the play of market forces. But it has now to pay more attention to the rules of the game as it were. Without rules, the system breaks down.