China's mounting woes will hit global economy

Chinese policies may discourage risk-taking, innovation and constrain its shift to higher-skilled manufacturing

In recent weeks, China has witnessed distressing woes ranging from severe power breakdowns, the meltdown of real estate developer Evergrande, and a sharp fall in the market value of technology, education, and real estate companies due to regulatory actions. These sudden shocks have caused considerable distress to people and the industry in several provinces of China, hitting global supply chains ahead of the forthcoming Christmas season and would lower the Chinese and global economic growth. Most of these woes stem from the administrative and regulatory initiatives of the Chinese authorities as part of the policy dictates of its top leadership.

There were reports of residents stuck in elevators in high-rise buildings, mobile phones and computers going blank, and candles sold out as electricity supply was cut off for long intervals in many localities. Last month, 16 of 31 provinces rolled out measures to ration electricity for industrial (from 8 am to 11 pm) and other users, plunging the industrial sector into chaos.

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Four reasons are ascribed for the power shortages. One, China's decision to reduce its coal imports from Australia for political reasons disrupted its coal supply. Second, increase in the price of thermal (for power plants) as also high-grade metallurgical coal (for steel making) as the global supply was unable to meet the sudden high demand, added to it the unwillingness of the Chinese government to pass on the increased price to customers. Third, reduced power generation from hydro and wind sources because of drought and bad weather. Fourth, certain provinces have pushed annual emission reduction targets to the end of the year and are now forcing power rationing on energy-intensive industries like metals.

In charge of its energy policies, China's Vice Premier Han Zheng recently ordered top state-owned companies "to increase coal supplies by all means." The electricity price has increased in certain areas, and efforts are to import more coal and augment domestic gas production.

The second set of problems spring from regulatory actions Chinese President Xi Jinping ordered to clip wings of technology, real estate, ed-tech, and gaming companies and force them to donate larger sums of monies to state regulators to "serve the country." It would reportedly use this money to improve the underprivileged classes' earnings for "common prosperity." Xi was aghast at the power wielded by the tech companies when Facebook and Twitter took down US President Donald Trump's accounts; he thought that the American style of capitalism was flawed and must not happen in China.

In November 2020, Xi personally intervened to stop the world's biggest IPO of Jack Ma's Ant Group. Subsequently, regulatory authorities were asked to launch anti-competitive and other actions to reduce the influence of these companies to ensure they could not threaten the power of the Chinese Communist Party (CCP). According to Xi, the party controls everything: military, foreign policy, education, or economy.

Xi's regime has cracked down heavily on the real estate sector. He has limited the amount of money, which real estate developers could borrow from the banks. An immediate casualty of his decision was the Evergrande group, which has 1300 projects in 280 cities with $300 billion in liabilities; it owes investors 1.6 million unfinished apartments and $88.5 billion to banks and bondholders (it has already defaulted on payment of $130 million in September 2021).

The repercussions of the failure of the Evergrande and other prominent real estate developers would be too massive as most middle and upper-class families have invested their life savings in them. The government can't let the real estate sector fail for China's socio-political stability; the expectation is that their debt would be purchased by banks or other public sector companies, postponing the pain to a later period.

Xi has acclaimed "common prosperity" as the "original quintessence" of socialism and necessary for the pursuit of a more robust manufacturing sector, reduce debt, cross-border data flows, the rise of foreign influence and income inequalities. Since the Chinese system lacks the necessary checks and balances, questions have been raised whether the above strategy would achieve the desired outcomes. Such policies may discourage risk-taking, innovation and constrain China's shift to higher-skilled manufacturing besides loss of international confidence and access to global capital.

Recurrent outbreaks of Covid-19 and China's policy of "zero tolerance" have hurt retail sales, earnings of the services, tourism and hospitality sectors and domestic consumption. Automobile and smartphones sales have contracted due to Covid-19 and chip shortages. Many economists believe that all these factors together will lower China's economic growth by few points. The resulting supply shock will hit global markets, pushing up the prices of Chinese textiles, toys, machine parts, and other exports. The global economy will feel its ripple effects since China accounts for a 15 per cent share of the world economy.

(Yogesh Gupta is a former Ambassador)

Disclaimer: The views expressed above are the authors' own. They do not necessarily reflect the views of DH.