that this will redirect money to consumption and business investment, or so-called ‘high quality’ growth. However, performing this sort of economic ‘hand brake turn’ firstly produces a great deal of uncertainty, which in turn creates seizures in the flow of credit via panic reactions among creditors, which can then spiral out of control due to contagion effects, above all financial distress in supply chains and indeed job losses. It also makes the process of balance sheet reconciliation and rebalancing even more challenging, often forcing the sort of rescue that the authorities want to avoid on moral hazard grounds, but then again allowing a Lehman moment would almost certainly be a great deal worse.
There is of course a much wider context for the array of regulatory interventions, which also needs to be considered, and it is dual aspect. China has ridden its luck on the back of the post-Cold War globalization and technology boom, but the row back against globalization was a train in motion long before the pandemic, which has only served to brutally expose some of the weaknesses inherent in ‘just in time’ production processes and globalized supply chains. However, if there is one lesson that should be learnt is that China is now fully integrated into the global economy, even if it is not politically. It is no more capable of decoupling itself from the world economy, than the rest of the world is capable of decoupling from China, let alone excluding it. Like so many powerful nations before it, it is learning that its efforts to secure its resource supply chains via its Belt and Road Initiative, and thereby to bind those economies to its own comes at a very high price, and in the longer term is often counterproductive.
the property sector, which in turn has accounted for around 25% of GDP. In prior episodes of such explosive growth in property sector related debt, it had nearly always been the case that local governments and regulators ended up intervening where the situation had gotten out of control, restructuring debt, and if necessary recapitalizing the entities. In turn this has encouraged lenders and investors to pile into lending ever greater sums of money to any entity (property mostly, but also other) that was in effect deemed to be ‘too big to fail’, in a classic race to the bottom, which erased any form of risk premia or credit differentiation, and by extension creating a great deal of moral hazard.
Mindful that the chronic over-reliance on debt (not just in the property sector) had become a serious threat to financial stability, and in many cases to fund projects that create little or no economic value, for example some 20-25% of properties in the most in demand cities are unoccupied, regulators moved to step up their hitherto, largely unfruitful efforts to curb debt growth. In the property and some other sectors this involved setting hard limits on cash to short-term debt, debt to asset and debt to equity ratios, which quickly choked off the ability to raise debt, in turning forcing liquidation of assets to pay down debt, and indeed suspension of some operations. The broader perspective is rather more important, namely that in clamping down on debt fuelled speculative activity, which produces little or no economic value, or what President Xi has called ‘fictional growth’, it is hoped
Equally China’s explosive growth over the past forty years has clearly taken hundreds of millions of its population out of poverty and created a great deal of wealth, but it now finds itself challenged on numerous fronts. To some extent, it is the victim of its own success, but like so many western countries, it has failed to adapt its economic models to its success, while paying lip service to confronting the increasingly destabilizing imbalances that have accumulated. As but one example, the environmental abuses and gross negligence that have been allowed to proliferate in its quest to achieve growth targets are now starting to prove costly as it is forced to rein in output, both due to pollution, and the deficiencies in its power supply infrastructure. In the case of the latter, it is clearly no worse than Western Europe, the US and Brazil, as has been so brutally exposed in recent months.
That said, in terms of adapting its regulatory models to deal with the excesses and the monopolies that have accumulated due to the rapid pace of digitalization of its and the global economy, it is in fact probably proving to be more proactive and indeed sensible. It is after all difficult to argue that placing restrictions on the amount of time that children spend gaming is malevolent. Nor are the moves to restrict and regulate education websites, which not only may not apply the highest standards in qualitative terms, but also effectively creates restricted access to learning, which in an economy with a rapidly ageing demographic and a shrinking workforce can only impair the economy’s innovative potential.
In conclusion, it has to be added that while its regulatory methodology and implementation leaves a lot to be desired, viewing China’s regulatory clampdown solely through the lens of political ideology is to say the least myopic, even if well-grounded criticism is always a necessity.
Marc Ostwald E:
marc.ostwald@admisi.com T: +44(0) 20 7716 8534
25 | ADMISI - The Ghost In The Machine | Q3 Edition 2021
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