The Myth of China’s Reconstruction

It is very difficult to prepare analytical reviews of the state of national economies in the post-covid period. Prior to the pandemic, “uncertainty” was more likely to apply to the analysis of theoretical global economic processes. At the moment, it can be used boldly in assessing almost all economic actors at all levels.

Expected results (GDP, investment volume, population income growth) are the main epithet of economic analysis today. Analytical forecasts are more reminiscent of alarming predictions.

Overcoming the pandemic COVID-19 by the main players in the world economy is only expected. But for some reason, this categorically does not apply to the analysis of the modern state of China’s economy. Both the World Bank, the International Monetary Fund, as well as Bloomberg-type analytical agencies have been joyfully trumpeting this year to overcome the crisis in the Celestial Empire. From their point of view, the following image is appropriate: the locomotive of world growth, having stood a little on a covid platform, rushed forward, dragging the entire world economic space behind it.

However, such a hasty admiration for Beijing’s achievements cannot but be surprising. First of all, due to the fact that only facts presented by the government and state institutions are used to compile victorious relations to improve its economy. There is an excessive utopia in assessing Beijing’s real economic achievements.

The triggering situations in the stock market, in the market of innovative investments and the banking sector, the state of the credit system are not taken into account. And their condition is very difficult. It can hardly be called “fantastically successful.” So, what happens in the economy of “a white swan pulling on the growth of the entire world space”? And what is the reality of the myth of his economic recovery?

Let’s start with positive factors. Knowing the peculiarities of Chinese statistics and if we accept the condition that the data are true, the results of the PRC on the post-covid recovery of the national economy are really impressive. The State Statistical Office of the PRC on January 18, 2021 published a report on the main achievements of the national economy. According to the results of 2020, GDP growth amounted to 2.3% (about $15.42 trillion). This, according to Bloomberg, is the world-highest indicator of national economic growth in 2020. The volume of investment in the industrial sector increased by 2.9% compared to 2019.

Investments in high-tech services grew by 9.1%, and investments in high-tech production grew by 11.5%. Nearly 12 million new jobs have been created, with 45% in the high-tech sector. The share of the value added of the tertiary sector of the economy in GDP reached 54.5%, which corresponds to an increase of 0.2% year on year.

In 2020, for the first time in the history of China, social reform was completed, aimed at creating a social insurance system and a pension system. Today, the social insurance system covers almost 95% of the population: 1.36 billion people. This is the largest social protection system for citizens in the world. The pension system covers over 1 billion people and guarantees them monthly payments. For reference: this is a third of the world population covered by the pension system. Social reform began to be prepared back in 2009. Its main goal is to transform the stratagem of behavior of wide segments of the population of China. It is expected that its implementation will allow to reorient it from accumulation towards increased consumption. According to experts, the government intends to spend more than $1.5 trillion annually on social reform. Obviously, Beijing has such money.

The beginning of 2021 was quite optimistic from the point of view of overcoming crisis phenomena. The economic indicators provided by state bodies for the first quarter are a confirmation. So, according to the Ministry of Industry of the PRC, the growth of industrial production in the first two months of 2021 was 3.5% compared to the same period of 2019.

The profit growth of China’s SME in the first two months of 2021 amounted to 72.1%, compared to the same period in 2019. The profit of the largest state-owned corporations by the end of the first quarter showed an increase of 31.1% compared to the pre-crisis period of 2019.

The positive dynamics of economic recovery is also observed in a number of indirect signs. Electricity consumption in the first quarter increased by 21.2%, mainly due to industrial SMEs. The growth of Russian gas exports through the Power of Siberia pipeline increased 3.2 times in annual terms. In March, according to the State Statistical Office, the volume of domestic air transportation almost completely recovered.

Since the beginning of 2021, Chinese companies have set a new historical record for M&A transactions. According to Refinitiv, it amounted to an unprecedented amount of $77.5 billion, which is almost three times their level for the same period in 2020. It is noteworthy that such behavior is not typical of Chinese companies at all. As a rule, the beginning of the year is not the most active period for Chinese M&A.

The main activity of M&A transactions falls on the high-tech sector, medicine and logistics. Activity in the high-tech sector and in medicine is expected. It is based on the launched import substitution strategy aimed at reducing the dependence of the high-tech sector on foreign technologies and combating the consequences of the COVID-19 pandemic. These are certainly uptrend Chinese M&A deals for years to come. In turn, the increase in the number of transactions in the field of logistics is a new trend of national M&A.

An example is the recent takeover of Kerry Logistics by the Chinese courier service SF Holding. The volume of the transaction amounted to $2.3 billion. Equally impressive is the takeover of CJ Rokin, China’s oldest logistics company, by Fountain Vest Partners, a private investment firm headquartered in Hong Kong, for $2.1 billion. The growth of M&A transactions in the field of logistics is likely due to the rapid and large-scale growth in the popularity of e-commerce during the pandemic.

A certain surprise for experts was a noticeable increase in M & A transactions in construction companies. So, the cement producer Xinjiang Tianshan absorbed four regional competitors for 98 billion yuan ($15 billion). It is not very clear why this was so unexpected: since the second quarter of 2020, the development of national infrastructure projects has been recognized by Beijing as one of the main triggers of economic recovery. Already by the third quarter, analysts from CCID Think Tank Electronic Information Institute, a state-owned think tank, and Haitong Securities, a large Chinese securities company, estimated government investment portfolios related to new infrastructure projects at $1.43 trillion.

It is expected that by 2025 the amount will increase to $2.51 trillion. In the development of infrastructure projects, 25 provinces are actively involved, implementing their own local plans. The most impressive is Shanghai’s plan, which sets an overall investment target of $38.7 billion for the next three years. Involuntarily, the question arises:

“Where will the Chinese government take such colossal financial resources?”

Indeed, according to the Ministry of Finance of the PRC, budget revenues in 2020 fell by 3.9%, which is $2.8 billion. Private tax revenues decreased by 2.3% ($1.7 billion). Revenues from value added tax, the main source of budget income, fell by 8.9% (to $6.4 billion), consumption tax – by 4.3% ($3.1 billion). Yes, of course, you can once again turn on the printing press. Neither state financial regulators nor the Central Bank, which do not play an independent role, can prevent this. But printing the yuan infinitely is impossible. It was already a common habit since 2015, and is enough.

The result of the difficult economic situation was an unprecedented increase in the public debt of the PRC. By the end of 2020, it amounted to 58.7% of GDP. The debt of the non-financial sector (industry + state + households) reached the level of 280.3% of GDP, which came close to the same indicator of the United States. But there is also the so-called “hidden debt” — the local debt of the state, hanging on the balance of state financial institutions. Financial regulators estimate its value at $12.9 trillion. At the same time, for some reason, analysts are prophesying China’s economy prosperity, while the US economy according to them faces an imminent death.

Perhaps world leaders of economic growth will again come to China’s aid. First of all, the US economy and a few EC countries, which, despite obvious difficulties, are beginning to overcome crisis phenomena.

The trade balance is traditionally an important factor for the Chinese economy. Export revenues since Deng Xiaoping’s economic reforms began are the cornerstone of growth. For many years, China’s stability relied on exports, and that on large-scale production of first cheap and not very high-quality consumer goods, and then medium-quality products of the high-tech sector. The pandemic COVID-19 damaged the main buyers of Chinese products. Only in the first two months of 2020 China’s external trade fell 11% ($591.9 billion). And here came the rescue for Beijing’s plan to improve the economy. According to the State Statistics Service of the PRC, in the first quarter there is a sharp increase in the volume of foreign trade. It reached an indicator of 41.2%, which corresponds to $834 billion. For the whole of 2019, it amounted to $662 billion.

There is a certain recovery in domestic demand, primarily due to an increase in online trading. In the first quarter alone, it exceeded $1.81 trillion, which is 10.9% more than the same pre-crisis level. At the same time, the situation in the offline trade sector is not so optimistic. The 12% drop that happened in 2020 has not yet been won back. Primarily due to subsidence in sales of the automotive and electronic industries

With cars, perhaps, everything is clear: where will you go to travel with the permanent possibility of another covid lockdown? With the subsidence of sales of electronic gadgets with the all-consuming love of the Chinese population for their purchase, the question is open. Is everything OK with the finances of the population of the “healthy” economy?

Strangely against the same background, a cotton trade war looks like, covering the Chinese domestic market. The boycott of the purchase of textile products by H & M, Converse, Adidas and Calvin Klein due to their refusal to use Xinjiang cotton is unnecessarily supported by the state. Maybe in this way the government is trying to mask another drop in sales in the domestic market.

Nevertheless, the growth of the trade balance had a positive impact on the state of the economy as a whole. As mentioned earlier, in the first quarter, positive changes appeared in the industrial sector of China. There is a significant increase in direct investment inflows, primarily in the high-tech sector. In the first quarter, it amounted to 4%.

Here the US stock market acts as the most important. We can say that there the situation with Chinese companies is a hype. In the first quarter of 2021, investment growth in Chinese companies amounted to 440% compared to 2020. This is almost a record $11 billion. Involuntarily, the question arises:

“Is this a sign of the confidence of American investors in the completion of the technological confrontation between the two countries against the background of Beijing overcoming postcovid economic difficulties?”

Obviously not. The confrontation has not yet been canceled. Joe Biden extended the action of (taken by the Donald Trump administration in May 2020) changes to the Foreign Direct Product Rule (rules for controlling goods manufactured abroad, but having US-made components, technologies or software). And this is a continuation and consolidation of the blow to Chinese production, primarily semiconductor products.

Beijing’s dream of becoming a world center for the development of artificial intelligence in 2030 remains under attack. And the utopian faith of American investors in Beijing’s ability to become first who overcomes difficulties in the economy is not involved at all. Clearly, this is a consequence of the unprecedented pumping of the US economy with new tranches by the Joe Biden government, which began in the new year. “Bidenomics” — this is how analysts determined this style of overcoming economic difficulties; a humiliating definition for the world’s first economy. However, these are the problems of the US leadership, and at first glance they have nothing to do with the topic of our study.

However, is this true? In China, there is a very alarming situation in the stock market, in the market of innovative investments and the banking sector, also with the state of the credit system. By the first quarter of 2021, China’s stock market capitalization reached a 5-year high. Its growth was 318% of GDP. This is a huge amount, 85% of which are private investments. There is a deja vu of the situation in 2008. True, then the growth amounted to “only some” 140% of GDP. In 2008, Beijing was able to fill the overheating of the stock market with non-secured yuan. Now the situation is completely different. In 2021, we are not just facing “overheating”. There has never been a bubble of this magnitude in the history of the world economy.

Where do the funds for feeding this bubble come from? Yes, all from the same source. But, this time, it is the government of Xi Jinping who singles out them. Beijing sent $785 billion to the economy for post-coronavirus recovery. Some of them were supposed to help industrial enterprises and banks, and some — to the previously indicated development of infrastructure facilities. It seems that almost all of them went to warm up the stock market. So, maybe we will help predictor analysts and introduce a new term that characterizes the current state of China’s economy — “Xijinpinoeconomics”?

The story of private loans complicates the situation. In 2020 alone, Chinese banks issued them for $3 trillion, with 20% coming from inclusive financing, including lending to SME. Taking into account previous loans, the total level of lending to the Chinese economy reached $30 trillion. Most of this money leaked to the Chinese stock market. Complicating the situation is the fact that the bulk of the funds belong to unskilled investors and relate to short-term loans. They are not aimed at the development of the real sector of the economy, but at short-term auction speculation, which, due to political correctness, is called “portfolio investments.”

It is this money that fuels the “bubble,” supporting insanely overbought and bloated stock prices of Chinese companies. All sections of the Chinese population are passionate about playing in the stock market. In anticipation of a quick profit, both students and pensioners rushed to investors. If the wave of bankruptcy covers the Chinese economy, it is difficult to imagine the level of social explosion that will cover it.

And bankruptcies have already begun. So, the largest HNA Group Co., Ltd, a conglomerate owned by Hainan Airlines, the world’s fourth-largest airline, announced in February 2021 that it had made an incredible effort to suspend the process. The next blow was the 14% drop in the CSi 300 on the stock market, which coincided with the start of the National People’s Congress. Not a very good moment.

Beijing again poured money into the incident. But if bankruptcy begins to spill constantly, the yuan printing press may not stand it. And the only way to overcome the social explosion remains the launch of sectoral bankruptcy by the government.

What will it choose? A social explosion, the scale of which is hard to imagine, or a loss of face in world reports on the success of China’s economy? Are such prospects a sign of a recovered economy? Probably not quite.

So what about the question of the complete restoration of the Chinese economy? Obviously, this myth is very far from reality. China is, definitely, only at the beginning of the journey. If you return to the image of the locomotive, China still only cares about itself and cannot yet pull the entire global economy, as it was in 2008.

By Marina Ken, Associate Professor, Faculty of Economics, RUDN

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