Since this spring, Beijing has canceled IPOs, fined tech corporations billions for antitrust violations, forcibly shut down China’s entire for-profit school sector, and sent CEOs running to face the government’s wrath. Even more serious, Chinese mega-developer Evergrande recently began running out of invoices for its more than $300 billion in debt, shaking global markets. These upheavals have awakened the world to a startling new possibility: Beijing might be willing to let some of its personal giants give way in an effort to reshape the economic style that made China a superpower.
This turmoil, which affects multiple industries and large swaths of the country, is the result of one main problem: China’s inability to borrow or buy a way out of the existing economic crisis. For decades, the country has relied on reasonable hard work and gigantic debts, doled out through state-owned banks, to fuel economic expansion, pouring money into giant apartment buildings, factories, bridges, and other projects at lightning speed. Today the country wants others to use and pay for everything built. But most of China’s population lacks the source of income needed to shift the economy from an economy driven by state investment to one sustained by customer spending.
As a result, China finds itself trapped in an overbuilt and overindebted system. Take as an example the country’s real estate market, valued at $52 trillion, of which the Evergrande crisis is the best example. way to shop and create wealth for China’s young middle class. One educator colorfully described this tendency to me as a “real estate cocaine addiction. ” It is also called the “conveyor belt of hell. “
While the government is now seeking to deflate the housing bubble without bursting it, it has been forced to prepare the country for an era of slower expansion and belt-tightening. And to make matters worse, China also faces an energy crisis fueled by rising coal costs, as well as an aging working-age population without enough resources to retire.
In the face of all of these obstacles, Beijing has made a dubious choice. Instead of continuing to open the economy to spur growth, the Chinese Communist Party is closing it. Under President Xi Jinping, Chinese socialism is reverting to a model not seen in decades, with tighter state control over much of the economy. That’s why you’re seeing Beijing cancel massive IPOs and level entire industries. Economists expect this ideological shift to slow growth even more, which in turn would make China’s attempts to transform its economy that much more precarious.
“I think Xi is incredibly ideological and focused on his legacy,” Charlene Chu, a debt analyst at Autónoma Research, told me. “You need to reshape China and put it on a global level, and that requires a reset of the way we used to do things. “
The transition from open markets to the state will not be easy to manage and the stakes are high for all of us. If Beijing fails to implement its ambitious plan, it could cause a shockwave that weakens the global monetary system, slows industry and devastates businesses around the world. The resulting chaos, and the ensuing crisis of confidence in the CCP, may simply lead to social instability in China, leading the central government to exert even tighter control over civil society.
In short, Beijing is executing a large-scale economic act, seeking to update its economic style with something unknown. In doing so, the weight of its old debt formula is shaking China. And if the country falls, it can simply drag the rest of the world along with it.
If you need to pinpoint the moment that put China on the path it is on today, go back to 1984. It was then that Deng Xiaoping, Chairman of the Communist Party, passed the Economic Structure Reform Decision, which rewrote the regulations of the Chinese economy. Instead of the state directly managing the commercial sector, it would now allow state-owned enterprises to thrive without direct government involvement.
This ideological flexibility – combined with the country’s creation of a fashionable banking formula – paved the way for the rise of personal businesses. Freed from direct government oversight and reaping the benefits of free lending, China’s productive sector has boomed. Rural citizens flocked to fill personal factories built on credit, and a middling elegance took shape. In 1992, 27% of the country’s population lived in urban areas. By 2020, this figure had increased to 61%.
All of this growth was supercharged in 2009, during the global financial crisis. Seeking to avoid a downturn, the CCP ordered banks to spray loans all over the economy, especially to the property sector. But as the debt bubble grew, the new buildings remained empty. Despite the booming economy, many Chinese weren’t making enough money to afford the homes they were building or the goods they were producing.
It was around 2011 when the world started to notice China’s jaw-dropping ghost cities and bridges to nowhere. Economists wondered when the debt bubble would pop, and there were several close calls. In 2015 it looked like China’s property market would collapse, along with the local governments that had helped finance them. But officials gave the sector a jolt by tearing down slums and relocating residents into new buildings.
The following year, Beijing initiated the procedure to gradually get rid of the system’s debt. He allowed some corporations to default on their loans, ordered local governments to close surplus factories, and closed coal mines that were no longer needed to supply them with energy. But as excessive as those efforts were, they managed to make a dent in China’s debt bubble.
And that’s just one aspect of the equation. Without a steady source of new jobs in industry and construction, little hope remains for the millions of Chinese citizens who have left their villages to earn money in the city. According to China’s National Bureau of Statistics, six hundred million people have only $2,700 to spend each year. With skyrocketing real estate costs in primary cities, what President Xi calls “the Chinese dream” – the concept that even the country’s poorest would participate in China’s immediate expansion and modernization – is beginning to seem out of reach.
In an attempt to revive the Chinese dream, Xi is pushing the idea that China is moving toward “common prosperity.” But exactly what that means is hard to say. It could mean higher taxes for the high-income citizens who benefited most from privatization — the generation of supertycoons who were allowed to “get rich first,” as Deng Xiaoping urged. Or perhaps it’s simply an attempt, using the socialist rhetoric of old, to steel citizens for more volatile times ahead. But either way, it won’t help matters if Xi’s common-prosperity agenda turns out to hurt the country’s new middle class.
The only certainty is that China is returning to extreme state intervention, private industry be damned. In the starkest example of state control, China wiped out its entire for-profit education sector in July, sending markets in the US, where some of the companies were listed, into a tailspin.
“They brought it down to almost 0 in a matter of days,” Chu said. “It shows a willingness to tolerate a lot more volatility and pain than other people expected. “
It is vital to note that a component of agitation also has to do with strength. By striving to reach out to China’s wealthiest citizens, Xi is building strength for himself and the CCP. Jack Ma, the billionaire founder of Alibaba, was once ubiquitous in Chinese society. Since the government began cracking down on its companies, it has largely disappeared. The founder of ByteDance, the company that owns TikTok, also resigned as CEO, saying he prefers “solitary activities. ” Online fan clubs of pop stars are regulated to inspire determination in the component. Last month, the former president of China’s largest alcohol maker was sentenced to life in prison for accepting bribes.
This lack of distribution of forces and pluralism in reviews presents a danger. Historically, the PCC has been a tug-of-war between openers and shutters: those who need to welcome foreign market forces and those who seek to limit foreigners’ access. But today the balance of forces has changed. Xi is a defiant relative, and his consolidation of strength (adding to a lifetime presidential appointment) has left no pro-openness opposition to press for a course correction if things go wrong.
And chances are, things will go wrong. As Beijing tries to evolve its economy into a new, more insular model, it will want to get rid of the landmines left behind by the previous model.
Take the example of Evergrande, which is now on the verge of default. Xi’s willingness to tolerate the credit relief imposed on the giant developers shows how determined he is to rebuild the economy. Last summer, to deflate the asset sector, Beijing brought in new signs of credit known as the 3 red lines. Developers were asked to withhold more money so they could cover their debt if things went wrong. Evergrande may not simply increase the mandatory budget, and it’s not the only one. Earlier this month, Fantasia Holdings, a luxury real estate developer, defaulted on a $206 million bond payment.
Investors around the world are still unsure when – or if – the Chinese government will stop the bleeding. In late September, the Chinese government met with state banks to make them understand that their role in all of this – above all – would be to help homeowners and keep the economy running, without resorting to their old tricks based on the debt.
“The government’s nuanced message is: ‘Don’t withdraw investment so that those developments can’t be completed, but also don’t fund a competitive expansion of new developments,'” Chu told me. Once again, I’m walking a tightrope.
The real estate fiasco also means that Beijing will have to play a game of confidence on two fronts. Investors deserve to take it for granted that the Chinese government can find a way to restructure the maximum debt assets of developers without causing a sudden drop in assets. sector, a task that will become more complicated as more developers show symptoms of stress. And consumers want to be sure that buying homes for money in the midst of a credit crunch is a smart move, hoping that home values will continue. get up. ” If “confidence in pre-sales collapses, the game may be over,” Chu said. “That would paralyze everything without delay. ”
That, in turn, could send real estate values tumbling and throw China’s banks (and everyone in the world of investors who hold their debts) into chaos.
This balance would be difficult to manage in all circumstances. But China’s sudden crisis of strength makes the task much more complicated. Electricity costs have more than doubled this year as pandemic lockdowns were lifted and demand for goods soared. China’s coal reserves were already dwindling, thanks to the past wave of mine closures. through the government, and Beijing made the scenario worse by banning coal imports from Australia, which pushed to investigate the origins of the coronavirus pandemic. Factories in 20 of China’s 31 provinces suffered a strong blackout, and corporations such as Tesla and Apple said the crisis would damage their supply chains. If Xi initiates a power takeover, it will be difficult to achieve it without strength.
All of those lingering difficulties would be less difficult to manage if the world were in a cooperative frame of mind with China. But that’s not the case. Under Xi, China has been more belligerent on the world stage. It has invaded democracy in Hong Kong, set up concentration camps for Uyghur Muslims in Xinjiang province, intimidated its neighbors in the South China Sea, and threatened Taiwan like never before. In response, Western policymakers have stood firm. In May, the European Union torpedoed an industrial deal with Beijing after China sanctioned members of the European Parliament for speaking out about human rights abuses in Xinjiang.
U. S. officials, disappointed that China is buying as many American products as it promised under an industrial deal with the Trump administration, are also taking a hard line. Earlier this month, in a speech to the Center for Strategic and International Studies, US Trade Representative Katherine Tai made clear that Washington needs Beijing to open its markets and respect foreign rule of law.
“Above all else, we must defend — to the hilt — our economic interests,” Tai said. That’s not what America sounds like when it’s cutting another country some slack.
But all this saber rattling is unlikely to replace economic reality. Lately, China still has no option to curb its expansion, and slow Chinese expansion will inevitably act as a drag on the global economy. As Joyce Chang, global head of research at JPMorgan, observed in a recent conference, a one percentage point drop in Chinese expansion is one point less than global expansion. Morgan Stanley estimates that from 2022 to 2025, China’s expansion will be 0. 4 percent smaller each year than previously estimated, and that’s a best-case scenario. If investment contracts sharply, Chinese expansion could fall by 1. 2 emissions each year, depressing global economies.
China’s slowdown will most directly affect its near neighbors in Asia — South Korea and Taiwan — as well as energy and commodity suppliers, like Russia and Norway. And the entire world will feel the weight of China’s weakness through slower, more expensive exports. What’s more, the economic repercussions will almost certainly be accompanied by social upheaval. The Stanford economist Scott Rozelle worries that Beijing will respond to any threat to its authority by ratcheting up nationalistic sentiment.
Since its inception, the Chinese fashion economy has been full of contradictions. He combined socialist control with a dynamic personal sector. This created a huge debt bubble that never burst. Throughout this economic modernization and social transformation, immediate expansion has maintained the stability of Chinese society. But if Xi’s attempts to resolve China’s economic differences cause that expansion to evaporate, social stability could well disappear with it. If this happens, we threaten much more than the collapse of the global economic order; We also threaten to see the collapse of global peace.
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