The Chinese economy, the second largest in the world, is on the edge of the precipice. Against the competition, the entire education sector for China for force has forced and has made CEO run away to avoid the anger of the government. And, what is more serious, the Chinese mega -company Evergrande has begun to stop paying its debt of more than 300,000 million dollars (259,446 million euros), which has shaken world markets. Seizures have awakened a new and surprising possibility to the world: that Beijing is willing to allow some of their private business giants to sink into an attempt to remodel the economic model that made China a superpower. > The crisis, which affects multiple sectors and large areas of the country, is the result of a big problem: China's inability to borrow or buy its exit from the current economic crisis. For decades, the country has supported cheap labor and huge amounts of debt, distributed by public banks, to feed economic growth, investing money in huge complexes of apartments, factories, bridges and other projects at the speed at speed at of the ray.
Now, the country needs people to use and pay everything that has been built. But the bulk of the Chinese population lacks the necessary income so that the economy goes from being driven by state investments to being sustained by consumer spending.
as a result, China is trapped in a system that is overcast and over -indebted. An example of this is the country's real estate market, valued at 52 billion dollars, whose maximum exponent is the Evergrande disaster. Being easy to ask for money, real estate speculation became a popular way of storing and creating wealth for the young Chinese middle class. An academic described this model in a picturesque way as a "real estate cocaine addiction." He has also been called "running tape to hell."while the government now tries the belt. And, to worsen things, China also faces an energy crisis fed by the vertiginous rise in coal prices, as well as a population of working age that ages without sufficient resources to retire. Given all these obstacles, Beijing has made a doubtful decision. Instead of continuing to open the economy to stimulate growth, the Chinese Communist Party is closing it. With President Xi Jinping, Chinese socialism is returning to a model that was not seen in decades, with a stricter state control over much of the economy. That is why you are seeing how Beijing cancels large exits and sweeps entire industries. Economists expect this ideological change to further slow down, which in turn would make China's attempts much more precarious to transform their economy.
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"I think XI is incredibly idealistic and is focused on its legacy," says Charlene Chu, debt analyst In Autonomous Research. "China really wants to remodel and put it on the global stage and that does require a reset of the way we have been doing things before." Manage and there is a lot at play for all of us. If Beijing fails in its ambitious plan, it could trigger expansive waves that would destroy the world financial system, slow down trade and devastate companies around the world. The resulting chaos and the crisis of faith in the Communist Party of China that would accompany him could lead to social instability in China, stimulating the central government to exercise even stricter control over civil society.
In summary, Beijing is on the economical tightrope, trying to replace its economic model with something unknown. In the process, the weight of its old system, plagued with debts, is making China staggered. And, if the country falls, it could be taken to the rest of the world. Where he is today, we must go back to 1984. It was then that Deng Xiaoping, president of the Communist Party, approved the decision to reform the economic structure, which rewritten the rules of the Chinese economy. Instead that the State directly managed all industrial sectors, allowed state companies to flourish without the direct participation of the government.
This ideological flexibility, combined with the creation of a modern banking system, raided the way for the appearance of private companies. Liberated from the direct supervision of the government and with borrowing in abundance, the Chinese manufacturing sector shot. The inhabitants of the rural areas went into mass to private property factories and built with debt, and a middle class was formed. In 1992, 27% of the country lived in urban areas. In 2020, the figure had grown up to 61%. Knowing what they think and what worries the executives of the world's main companies with a selection of stories sent by Business Insider Spain at the time every morning.
All this growth shot in 2009, during the world financial crisis. Seeking to overcome the recession, the Communist Party of China ordered banks to grant loans to the entire economy, especially the real estate sector.
But, while the debt bubble grew, the new buildings remained empty. Despite the rise of the economy, many Chinese did not earn enough to afford the houses they built or the goods they produced. anywhere in China. Economists wondered when the debt bubble would explode and there were several moments when he was about to do so. In 2015 it seemed that the Chinese real estate market was going to sink, along with local governments that had helped finance it. But the authorities shake the sector demolishing neighborhoods and relocating residents in new buildings. of the system. It allowed some companies to stop paying their loans, ordered local public bodies to close redundant factories and dismantled the coal mines that were no longer necessary for energy supply. But, no matter how extreme these efforts were, they barely made a dent in the Chinese debt bubble.
and that is just part of the equation. Without a constant flow of new jobs in industry and construction, there are few hopes for the hundreds of millions of Chinese citizens who left their villages to earn money in the city.
According to the National Statistics Office of China, 600 million people are barely 2,300 euros to spend a year. With housing prices in large cities, what President XI calls "Chinese dream" - the idea that even the poorest in the country participate in the rapid growth and modernization of China - begins to seem unattainable.
Chinese socialism is changing (again)
in an attempt to revive Chinese dream, XI is driving the idea that China is moving towards "shared prosperity." But it is difficult to say exactly what that means. It could mean a tax rise for citizens with high income that has benefited the most from privatizations, the generation of supermillonaries who were allowed to "enrich themselves first", as Deng Xiaoping urged. Or maybe it is simply an attempt, using the socialist rhetoric of yesteryear, to prepare citizens for more volatile times. But, in any case, it will not help the "shared prosperity" agenda end up harming the new middle class of the country.
The only certainty is that China is returning to the extreme state intervention , apart from private industry. In the clearest example of state control, China eliminated in July all its educational sector with profit, making the United States markets, where some of the companies were quoted, plummeted. They reduced almost zero in a matter of days, "says Chu. "It shows a willingness to tolerate much more volatility and suffering than people expected." P> Part of agitation, it is important to point out, it also has to do with power. When taking measures to stop the richest citizens of China, XI is monopolizing power for itself and for the Communist Party of China. Jack Ma, the founding billionaire of Alibaba, was before an omnipresent presence in Chinese society. But, since the government began to take drastic measures against its businesses, he almost completely disappeared from the scene.
The founder of Bytedance, the company that owns Tiktok, also resigned from his CEO position, saying that he preferred "solo activities." Even the online fans clubs of pop stars are regulating to encourage devotion to parties. Last month, the former president of China's main liquor manufacturer was sentenced to life imprisonment for accepting bribes.
This lack of distribution of power and pluralism of opinions involves a danger. Historically, the Communist Party of China has maintained a strip and loosen between the most opening sector and the conservatives, that is, those who want to welcome the external forces of the market and those who seek to restrict the access of foreigners. But now the balance of power has changed.
xi is a convinced conservative and its consolidation of power - including a life appointment as president - has not left any favorable opposition to the opening that can be pressed to correct the course if things are twisted. >
Reuters/Yuya Shino
and things have many chances of twisting. As Beijing tries to bring the economy to a new more hermetic model, it will have to avoid the land mines left by the old one.
It is enough to think of Evergrande, which is on the verge of bankruptcy. XI's disposition to consent to reduce credit to the great promoters demonstrates to what extent he is committed to the reconstruction of the economy. Last summer, to deflate the real estate sector, Beijing introduced new credit measures known as the 3 red lines. Promoters were demanded that they had more effective to be able to assume the payment of debt if things were crooked. Evergrande could not gather money and it is not the only one. Earlier this month, Fantasia Holdings, a luxury real estate promoter, failed to pay a bonus of almost 180 million euros. Chinese government will stop the bleeding. At the end of September, the Chinese authorities met with state -owned banks to let them know that their role in all this - on top of all - would be to protect housing owners and maintain the economy running, without resorting to their old indebtedness tricks. Once again, walking on the tightrope. Investors have to believe that the Chinese government is able to restructure the most indebted real estate promoters without causing a sudden fall in the real estate sector, a task that will be more difficult as more promoters give stress samples.
and consumers must have the confidence that the purchase of homes with cash amid a credit crisis is an intelligent decision, with the expectation that the value of the properties will continue to rise. "If the confidence in the presales collapses, the game could be over," says Chu. "Everything would be paralyzed immediately."
that, in turn, could trigger a collapse from real estate companies and make Chinese banks - and a whole world of investors who have their debt - rush into chaos.
Balance management could be complicated in any circumstance. But China's sudden energy crisis complicates him even more. Electricity prices have far duplicated this year, when confinement by pandemic and shooting the demand for goods. From the increasing paper, to the possible rise in the price of the iPhone
the national coal warehouses of China were already diminished, thanks to the previous wave of mines closures by the government, and Beijing worsened the Things by prohibiting the imports of coal from Australia, which was pressing to investigate the origins of the Coronavirus pandemic.
Factories of 20 of the 31 Chinese provinces have suffered power outages and companies such as Tesla and Apple have said that the crisis will affect their supply chains. If Xi is starting a political offensive, it will be difficult to execute it without energy. With China. But it's not like that. With XI, China has become more belligerent on the world scene. He has interfered in the democracy of Hong Kong, has created concentration camps for Uigures Muslims in the province of Xinjiang, has intimidated his neighbors in the South China Sea and has threatened Taiwan as never before.
In response, Western political leaders have entrenched themselves. In May, the European Union torpedoed a commercial agreement with Beijing after China sanctioned members of the European Parliament for denouncing human rights violations in Xinjiang.
American leaders, annoying because China is not buying as many American products as promised in the framework of a commercial agreement with the Trump administration, they are also adopting a hard line. Earlier this month, in a speech at the Center for Strategic and International Studies, the United States Commercial Representative, Katherine Tai, made it clear that Washington wanted Beijing to open its markets and respect the rule of international law.
"Above all, we must defend - even the end - our economic interests," Tai said. That is not what it seems in the United States when it comes to taking another country. Modify economic reality. China has no real option at this time than to slow down its growth and a China that grows slowly will inevitably act as a brake for the world economy. As Joyce Chang, JPMorgan's global investigation head, said in a recent talk, a decrease in a percentage point in China's growth subtracts half point from world growth.
Morgan Stanley estimates that, between 2022 and 2025, China's growth will be 0.4 percentage points lower every year of what was previously estimated and that in the best case. If the investment contracts sharply, China's growth could fall 1.2 percentage points every year, which in turn would depress economies around the world.
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China's deceleration will more direct like Russia and Norway. And everyone will feel the weight of China's weakness through slower and more expensive exports. In addition, it is almost certain that economic repercussions will be accompanied by social revolts. Stanford Scott Rozelle's economist fears that Beijing responds to any threat to his authority by increasing nationalist feeling.
Since its inception, the modern Chinese economy has been full of contradictions. He combined socialist management with a dynamic private sector. He created a huge debt bubble that did not explode. Throughout this economic modernization and social transformation, rapid growth maintained the stability of Chinese society. But, if XI's attempts to solve China's economic discrepancies make that growth evaporate, social stability could disappear along with it. If that happens, we risk more than the collapse of the world economic order; We also risk the rupture of world peace.
