To the bewilderment of many, the Chinese Government appears to be targeting many of the largest and most successful companies with punitive regulatory actions. Some of these include:
- Anti-monopoly fines against Tencent, Baidu (China’s Google) and Alibaba (China’s Amazon);
- Suspending the Ant IPO (China’s PayPal) and the near disappearance of Jack Ma (the founder of Alibaba and China’s richest person) from the corporate scene;
- Removing the Didi (China’s Uber) application from Chinese app stores; and
- A crackdown on the online education sector, banning for-profit school curriculum tutoring, are some examples.
Recently, some sizeable cracks have begun appearing even within the financial system. Evergrande (one of China’s largest property developers) and China Huarong Asset Management (an asset manager set up by the Government to hold distressed assets) are on the verge of failure without Government support. The total liabilities of Evergrande may be as high as US$300 billion and it seems increasingly likely that bondholders will not be repaid in full.
China Huarong Asset Management is in turmoil following the conviction and execution for corruption of its Chair Lai Xiaomin six months ago. The value of assets on its balance sheet is in question and it has yet to release financial accounts for 2020.
These events in isolation are not necessarily cause for concern. Both companies (like many others in the past) could have their situation resolved by the Government. However, both fit in the “too big to fail” category and there is a low risk that the Government could mis-manage their failure. This could trigger a more systemic shock through the Chinese financial system, which may trigger a severe market reaction domestically and overseas.
Is China’s miracle ending? That miracle consisted of very exceptionally strong growth of the economy. By 2010, GDP per capita, adjusted for inflation, was 17 times higher than it had been in 1980.
The recent efforts by Xi Jinping to control the economy more tightly will diminish future growth. Prior to Deng Xiaoping’s economic reforms in the early 1980’s, most Chinese lived in poor, rural communities where job opportunities were limited to very inefficient agriculture. This inefficient, small-scale, un-mechanized agriculture produced very little earnings. Poverty was the norm, not the exception. With Deng’s reforms, factories blossomed in the cities. Poor rural people moved to take jobs in cities. Incomes soared. Early success led to follow-on reforms that further grew the economy.
As China’s communist system morphed into a more market-oriented system, economic performance improved. But in recent years China’s governance has shifted in a very anti-growth direction. Is that the primary intent of Xi Jinping? To have increased control over all aspects of Chinese life. That will worsen economic opportunities. China’s communist party argues that it should have more control over management decisions of companies. Quashing Jack Ma’s IPO of the company Ant is an example.
The flow of lending to private companies in China collapsed after Xi took power, according to Nicholas Lardy of the Peterson Institute. Funds were, instead, channelled to state-owned enterprises. The state-owned companies place higher priority on serving political leaders than economic efficiency. And with lower economic efficiency, worker’s productivity is lower, limiting wage possibilities. The most productive opportunities are skipped in favour of the most politically favoured opportunities.
Xi’s power grab does not spell recession for the huge economy, but it does spell the end of rapid economic growth. American businesses will find Chinese sale opportunities growing much less rapidly than in past years. On the plus side for companies around the world, China will leave business opportunities that it could have been exploited otherwise.
References:
Red flags in China, July 29, 2021 (https://www.drummondcp.com)
China’s economic miracle is ending, Bill Conerly, May 4, 2021 (https://www.forbes.com)
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