OpinionLamp Post

China’s cratering economy

The chickens come home to roost

China wants to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)

Japan, Australia, and Canada are not happy China’s economy is tanking, with Bank of America Corp says growth could be just over 2% in 2022

PingPong wants to cut the hugely inflated real estate sector to size, while regulating everything from education to technology, even as power shortages and the virus are hurting

He wants to prevent disaster rather than stimulate growth

The decade long Great Depression of 1929, the worst economic downturn in the history of the industrialized world, sent Wall Street into a panic and wiped out millions of investors

Caused by declines in consumer demand, financial panics, and misguided government policies, it produced drastic declines in output, severe unemployment, and acute deflation in almost every country of the world

Does that sound familiar?

Less than a century later, it is haunting China

From 2015 onwards, as the economy slowed, companies and families sent their money out of the country for investment or safekeeping

China’s central bank spent billions of dollars from its reserves each month to prop up the renminbi and slow its weakening, making the same mistake that several Asian economies did during the contagion in the 1990s

China was unwilling to accept that the era when the world rushed to invest in China to build factories or apartment buildings – generally, to get a piece of the action was fading

In the first half of 2014, amid a deepening slowdown of the economy, the Chinese government began encouraging ordinary Chinese to buy stocks with media reports suggesting that the government would back them

Prices soared more than 150 percent with the introduction of margin trading and valuations became wildly out of line with corporate profits, but the Chinese Securities and Regulatory Commission (CSRC) never intervened

Once the bubble burst, the Chinese government stepped in with heavy-handed intervention that included a massive $400 billion program to support stock prices, a virtual ban on short-selling, restrictions on selling by major shareholders and the loosening of margin lending regulations

The move was poorly timed and was only temporarily effective. Within a month, Chinese equity markets had lost one third of their total value and it was clear that the policy had failed to stabilize and prop up prices

In a turbulent environment companies scrambled to keep pace with runaway growth and dramatic slowdowns, massive urbanization and huge rural markets, fierce competition and endemic corruption

Economists inside and outside the country warned that China’s debt- much of it hidden away in the books of local governments and state-run companies – could disrupt the financial system

Goldman Sachs says in its end-September 2021 assessment that China’s hidden local Government debt has trebled in the last 8 years and now exceeds half of GDP

China grew fast by loading up on debt and lent recklessly, but with its aggressive and predatory international lending is now in a credit trap since a big chunk of its loans was to countries in debt distress

Inequality is soaring, making Mao turn in his mausoleum, and Xi wants to revert to the basic principles of communism with Chinese characteristics – financial stability is the new mantra

Local Governments are stumped since most of their revenue (about USD 1 trillion annually) comes from land sales to developers

The recovery from the Great Depression was spurred largely by the abandonment of the gold standard and the ensuing monetary expansion

For “gold standard” read decoupling from China, and the world will, after intense paid, be well on its way to recovery

China blames everyone else except itself because the Communist God can do no wrong

Xi PingPong is all set to prove it

China banned coal imports from Australia to punish it for demanding an impartial enquiry into the origins of the Chinese virus

In recent weeks, more than a dozen Chinese cities imposed restrictions on electricity use

Chinese attempts to kickstart the economy have led to increased demand for energy and collided head on with a shortage of thermal coal

Goldman Sachs estimates that possibly half of China’s industrial activity has been affected by power shortages while millions of homes face darkness

There is severe electricity rationing in China

Prices of coal, oil, natural gas have increased 200-250% in some cases. It is difficult for power plants to buy at these prices and sell power at old rates

The chickens are coming home to roost!

How does China balance its international bluster with the fragility of its economy? Remember what the Afghanistan (mis)adventure did to the Soviet Union?

The image of China peddled by apologists is based on myths, fantasies, propaganda, and deceptive data collection

Following the 2008 global financial crisis, Beijing unleashed $2 trillion in new lending and made other moves that dumped still more credit into the financial system

China became one of the world’s most indebted economies in less than a decade, with the highest debt ratios of any developing country in history

When asked if they have borrowed money from China, most poor nations will hum and haw before confessing: “Yes we have but owing to the confidentiality clause we cannot tell you how much or the terms”

For its much-touted Bilk and Rob (sorry, Belt and Road) Initiative, China loaned almost USD 400 bn off-the-books to at least 42 countries (as per the latest information from Aid Data) trapping them in unsustainable concealed debt levels (beyond 10% of GDP)

BRI began as a crass commercial project, to make use of China’s overcapacity in metals, cement and other industries and its big unemployment problem

Borrowers were mostly countries with junk ratings with no other “clean” options as they would never be able to fulfill IMF conditions

Interest rates charged by the Chinese were much higher than those available internationally and the lender has the discretion to cancel loans or demand full repayment ahead of schedule

Chinese lending contracts allow lenders to influence the debtors domestic and foreign policies

If a country is heavily indebted, it can hardly refuse to offer its national assets for further lending or finance. The corrupt ruling elite is also offered part of the cake

There is an unwritten expectation from the BRI recipients that they would support China’s political and other interests; otherwise, the tap would be turned off

BRI infrastructure projects typically take over 3 years to complete, ensuring employment for the predominantly Chinese companies implementing them

China outspends the USA and rich countries by 2:1 on BRI projects, spending USD 85 bn annually (except in 2020-2021 when the amount was substantially lower), but China’s loans to grants ratio is a staggering 3:1

That money is not coming back

Win-Win’s expiry date is over

Many BRI nations have mothballed high profile projects owing to corruption, overpricing, and fast rising anti-China public sentiment

BRI white elephants languish semi-finished around the world

According to the Green Belt and Road Initiative Centre, a research organization, Chinese investment slumped in 2020 to USD 47 billion, just about half of the previous year, while BRI loans fell from USD 75 billion in 2016 to USD 3 billion in 2020

An Aid Data report that analyzed over 13,000 Chinese so-called “developmental” projects shows that over a third of them have faced implementation hurdles such as corruption, labor violations, environmental hazards, and public protests

What will happen to the BRI that began 7 years ago with so much fanfare to link imperial China through “friendship deals” with her tributaries (the rest of the world)?

Over 20 years, China has lent Africa some USD 160 bn for largescale infrastructure projects and the IMF says from 2021-2025 African nations would need additional financing of around USD 300 bn to step up their spending response to the pandemic

According to reports that I have seen, at least 18 African nations are renegotiating their debts while another 12 have sought debt relief even as several courts and parliaments in Africa probe China’s opaque deals

China is hoist with its own petard

The Director-General of the Chinese Foreign Ministry’s International Economic Affairs Department, said last year that 20% per cent of BRI projects were seriously affected while other 30-40% witnessed adverse impact, owing to the virus

There is also the interesting question of what China can do if a debtor nation refuses to repay its debt to China

In August 2020, Papua New Guinea refused to repay a USD 74 mn loan used by Huwawei to build a fancy data centre that exposed Government files to theft

Minister Timothy Masiu called it a failed investment that barely works with insufficient money set aside for maintenance and operations. He said firewalls expired two years before project was commissioned!

The flightless and long dead 16th century bird from Mauritius called the Dodo became a symbol of extinction and obsolescence

The BRI has done this in double quick time

It is the scam of the millennium

The September 2021 USD 305 bn bankruptcy of China’s largest property developer Evergrande (the most indebted property developer in the world) has messed up its financial system

Were subprime mortgages and easy loans not the main cause of the 2008 global financial meltdown that began with the world’s largest economy?

The CEO of the company flaunted his guanxi (connections) and was decorated by the regime as an “excellent builder for the socialist cause with Chinese characteristics”

PingPong has reversed course and wants to terminate the excesses of decades of breakneck growth powered by a relentless rise in property prices

In a recent essay in the official Chinese journal Qiushi, PingPong called for high-quality “genuine growth” (as opposed to “fictional growth”), based on consumption (driven by increases in household income rather than rising household debt), exports, and business investment

The property bubble has resulted in a lot of empty homes and apartments – between one-fifth and one-quarter of the total housing stock, especially in more desirable cities – owned by speculative buyers who have no interest in either moving in or renting out

Whom the gods would destroy, they first deprive of reason, is a classical Greek warning, the Indian equivalent being vinash kale, vipreet buddhi

Are you listening PingPong?

 

Author:

Deepak Vohra

Ambassador Dr. Deepak Vohra, Made in India,
Special Advisor to Prime Minister, Lesotho, South Sudan and Guinea-Bissau,
Special Advisor to Ladakh Autonomous Hill Development Councils, Leh and Kargil, Gauri Sadan, 5 Hailey Road, New Delhi 110001.

 

I am not Indian because I live in India, I am Indian because India lives in me!

They said: Hide from the storm; I replied: I am the storm  

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