Since this spring, Beijing has canceled initial public offerings, fined tech companies billions for antitrust violations, forcibly shut down China’s entire for-profit education industry, and sent CEOs running for the exits to avoid the government’s ire. Even more dire, the Chinese megadeveloper Evergrande recently started missing payments on its more than $300 billion in debt, shaking global markets. The convulsions have woken the world up to a startling new possibility — that Beijing may be willing to allow some of its private corporate behemoths to collapse in a bid to reshape the economic model that made China a superpower.
This turmoil, which affects multiple industries and gigantic areas of the country, is the result of a major problem: China’s inability to borrow or buy its way out of the existing economic crisis. For decades, the country has depended on hard, reasonable work and gigantic efforts. debts, distributed through state-owned banks, to fuel economic expansion, by making a cash investment in gigantic developments of apartments, factories, bridges and other projects at breakneck speed. Today, the country wants other people to wear and pay for all that has been But most of China’s population lacks a source of income to transition from an economy driven by state investment to one sustained by customer spending.
As a result, China finds itself stuck with a system that is overbuilt and overindebted. Take the country’s $52 trillion property market, of which the Evergrande mess is the poster child. With money easy to borrow, real-estate speculation became a popular way to store and build wealth for China’s young middle class. One academic described this model to me colorfully as an “addiction to real-estate cocaine.” It’s also been called a “treadmill to 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 tighten its belt. And to make matters worse, China is also facing 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 he’s focused on his legacy,” Charlene Chu, a debt analyst at Autonomous Research, told me. “He really wants to reshape China and put it on the global stage — and that does require a reset from the way we’ve been doing things previously.”
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 shock wave that weakens the global monetary system, slows industry and devastates businesses around the world. The resulting chaos, and the resulting 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 indebted formula is rattling China. And if the country falls, it can just creep the rest of the world to stay with it.
If you want to pinpoint the moment that set China on the path to where it is today, you have to go back to 1984. That’s when Deng Xiaoping, chairman of the Communist Party, approved the Decision of Reform of Economic Structure, which rewrote the rulebook for the Chinese economy. Instead of the state directly operating every industrial sector, it would now allow state-owned businesses to flourish 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 supervision 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 this expansion accelerated in 2009, during the global currency crisis. To avoid a slowdown, the CCP ordered banks to extend larger loans to the entire economy, specifically to the real estate sector. But as the debt bubble grew, the new buildings remained empty. Despite a booming economy, many Chinese did not earn enough money for the homes they built or the goods they produced.
It was around 2011 that the world began to authenticate the impressive ghost towns and bridges that lead to nowhere. Economists wondered when the debt bubble would burst, and in several cases it was narrowly averted. In 2015, it looked like the Chinese real estate market was going to collapse, along with the local governments that had helped finance it. But the government has given the sector a boost by destroying slums and relocating people to 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 manufacturing and construction jobs, little hope remains for the millions of Chinese citizens who have abandoned 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 real estate costs skyrocketing 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 the question. its reach.
In a bid to revive the Chinese dream, Xi promotes the concept that China is moving toward “unusually prosperity. “But it’s hard to say precisely what that means. This may simply mean higher taxes for the high-income citizens who benefited the most from privatization: the generation of super-tycoons who were allowed to “get rich first,” as Deng Xiaoping insisted. Or perhaps it is simply an attempt, an outdated socialist rhetoric, to prepare citizens for more volatile times to come. But either way, it would not improve the situation if Xi’s usual prosperity calendar proves detrimental to the country’s new middle class.
The truth is that China is returning to excessive state intervention, personal industry be damned. In the most striking example of state control, China eliminated its entire for-profit school sector in July, sending U. S. markets, where some companies were listed, into a tailspin.
“They brought it down to almost 0 in a few 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 one component of lifting is also about strength. By reaching out to China’s wealthiest citizens, Xi is building strength for himself and the CCP. Jack Ma, the billionaire founder of Alibaba, once had a ubiquitous presence in Chinese society. But since the government began cracking down on his companies, he has largely disappeared from sight. The founder of ByteDance, the company that owns TikTok, also resigned from his position as CEO, saying he liked “solitary activities. “Even the pop stars’ online fan clubs are regulated to inspire devotion to the component. Last month, the former president of the world’s largest Chinese liquor maker was sentenced to life in prison for accepting bribes.
There is danger to this lack of power sharing and pluralism of opinions. Historically, the CCP has been a tug of war between openers and closers — those who want to welcome outside market forces and those who seek to restrict foreign access. But now the balance of power has shifted. Xi is a defiant closer, and his consolidation of power — including a lifetime appointment to the presidency — has left no pro-opening opposition to push for a course correction should things go awry.
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 credit cuts imposed on big developers shows how determined he is to rebuild the economy. Last summer, to deflate the real estate sector, Beijing introduced new signs of credit known as the 3 red lines. Developers were required to have more money to be able to cover their debt if things went wrong. Evergrande was unable to increase the mandatory budget. . . And he is 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 still don’t know when – or if – the Chinese government will stop the bleeding. In late September, the Chinese government met with state-owned banks to make clear that their role in all of this – first and foremost – would be for landlords to keep the economy running, without resorting to their old debt-based tricks.
“The nuanced message from authorities is: ‘Don’t pull the funding so these units can’t be completed, but don’t fund an aggressive expansion of more new developments either,'” Chu told me. Once again, walking a tightrope.
The property fiasco also means Beijing needs to run a confidence game on two fronts. Investors need to believe the Chinese government can figure out how to restructure the most indebted property developers without causing a sudden crash for the real-estate sector — a task that will become more difficult as more developers show signs of strain. And consumers need to have the confidence that buying homes with cash in the midst of a credit crunch is a smart move, in the expectation that property values will keep rising. “If confidence in presales tumbles, that could be game over,” Chu said. “It would bring everything to a halt immediately.”
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 domestic coal reserves were already dwindling, thanks to the past wave of governance. mine closures and Beijing made the situation worse by banning coal imports from Australia, prompting pressure to investigate the origins of the coronavirus pandemic. Factories in 20 of China’s 31 provinces suffered a forceful 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 force.
All of those persistent 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, we will have to protect, until the end, our economic interests,” Tai said. This is not what the United States looks like when it gives another country a little respite.
But all the saber-rattling isn’t likely to alter the economic reality. China has no real option at the moment but to slow its growth, and a slow-growth China will inevitably act as a brake on the global economy. As Joyce Chang, the global head of research for JPMorgan, observed in a recent talk, a 1-percentage-point decline in China’s growth takes half a point off global growth. Morgan Stanley estimates that from 2022 to 2025, China’s growth will be 0.4 percentage points lower each year than previously estimated — and that’s the best-case scenario. If investment contracts sharply, China’s growth could drop by 1.2 points lower each year — which in turn would depress economies worldwide.
China’s slowdown will directly affect its close neighbors in Asia – South Korea and Taiwan – as well as its energy and raw materials suppliers, such as Russia and Norway. And the world as a whole will feel the weight of China’s weakness through slower and more expensive exports. Furthermore, the economic repercussions will be accompanied, at most, by social unrest. Stanford economist Scott Rozelle worries that Beijing will respond to any threat to its authority by exacerbating nationalist sentiment.
Since its inception, China’s fashion economy has been full of contradictions. He combined socialist control with a colorful personal sector. This created a huge debt bubble that failed to burst. Throughout this economic fad and social transformation, immediate expansion has maintained the stability of the Chinese economy. But if Xi’s attempts to resolve China’s economic differences cause that expansion to evaporate, social stability may disappear with it. If this happens, we threaten much more than the collapse of the global economic order; We also threaten to see the outbreak of global peace.
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