A Crisis Year with Chinese Characteristics
Residents enjoy the sun near a display promoting winter sports on New Year's Eve in Beijing, China, Friday, Dec. 31, 2021. (AP Photo/Ng Han Guan)
Residents enjoy the sun near a display promoting winter sports on New Year's Eve in Beijing, China, Friday, Dec. 31, 2021. (AP Photo/Ng Han Guan)

A Crisis Year?

There is a good case to be made that 2021 has been a series of financial and corporate crises.  Problems around too much leverage in the economy have been evident for all to see, but where is the panic?  Where is the resulting global impact?  Wasn’t there a “Lehman Brothers” moment?  Instead, we had a year of crises but with Chinese characteristics, a series of extremely high-profile hits to the corporate and state sector but all remarkably well contained within a controlled and managed economic system.  Chinese leaders don’t have a magic wand to solve their economic problems, but they do have tools to muffle the effects and fall out.  Primarily they do so by making what would be acute shocks into developed and open markets into chronic long-term problems which continue to weigh on policy and growth for years to come.  The fallout can also be more effectively managed because for all the high-profile stock price collapses of this year they are all seen primarily in either Hong Kong or New York.

This year started with markets still reeling from the suspension of the giant Ant Financial IPO leaving everyone guessing what would come next.  Few were prepared for the raft of regulatory changes that were being drafted.  This column has already written this year about some of the prominent failures, but it is worth listing them again as the year closes to grasp the scale of what has been seen.  Huarong Asset Management can only be described as financial royalty within China’s financial infrastructure.  The “bad bank” counterpart to ICBC was established over twenty years ago to help work out the bad loans which reckless lending policies inevitably created.  As it took on more failed loans and businesses its business scope expanded well beyond its original mandate but could only do so because of the belief in its implicit state guaranteed status.  It eventually failed, its bonds collapsed in price, its Hong Kong listed stock has been suspended for 9 months and the state eventually constructed a bail out lead by CITIC and other centrally controlled SOE which effectively pushed Huarong from the inner circle of the financial elite.  For those around at the establishment of Huarong that it could end in such a way seems inconceivable, yet it happened.  It joined a growing list of financial behemoths which had fallen and become years long restructuring projects for the regulators.

The ongoing collapse of Evergrande, the largest private property developer in China is just as traumatic.  The stock is down 90% for the year, the company’s debts total around 300 billion USD and although a handful of assets have been sold there isn’t a credible rescue plan in place.  The company has announced it has restarted building at most of its mainland construction projects which is essential if the government is to manage on the populist fallout domestically.  Homeowners care little about unpaid debts of the company, but they do rightly demand the delivery of properties they have already paid for.

By July the tech sector within China was in turmoil.  Didi Chuxing, the ride hailing giant had pushed ahead with a US listing even as the regulatory environment worsened.  Upon listing China suspended their app from local downloads and said that it was coming under review from the Cyberspace Administration of China.  The issuance of a new rules by the CAC around protecting data security of offshore listings sudden became the must-read document for the financial industry.  Didi has since been advised to delist from the US in what has become a posterchild of poor disclosure and political risk which Chinese companies suffer from.  The stock which listed at 14 USD is currently trading around 5 USD.  July too saw an overnight clampdown on the online tutoring industry, foreign investment was banned, companies restricted from making profits and business scope severely curtailed.  Literally overnight 100 billion USD of market capitalization was wiped off the listings and classrooms shuttered across China.

The breadth and deep of the crackdown and corporate collapse is unprecedented in recent Chinese history, perhaps the closure of thousands of SOEs back in the 1990s is the nearest comparison but that was in a very different sort of Chinese economy.  Property, tech, and consumption are the key drivers of growth within China today.

The corporate failures though only represent part of the stresses the government is having to deal with.  Within months of agreeing the Comprehensive Agreement on Investment with the EU last year the deal was completely stalled as sanctions and counter sanctions over Xinjiang left European Parliamentary approval a non-starter.  The concerns, rhetoric, and actions in response to human rights abuses in Xinjiang and in HK have not lessened during the year nor are they likely too next year.  Of more immediate concern domestically though is a Caixin reported news story of late in the year around Hegang in rustbelt Heilongjiang province which has cancelled a hiring plan of lower-level government workers because they simply don’t have the money.  Only a few years ago the place was booming as a coal town and now they can’t afford to hire basic state workers.  They won’t be the only local authority in such a position, the slow down in property sales, intrinsically tied to the Evergrande collapse, has severely reduced the cashflows of many cities and towns.

“Only difficult years ahead”

Two years ago, this column looked at how China would fair in the coming ‘20s decade.  It suggested that China had only difficult years ahead of it as both economic stresses and worsening geopolitics pressed in on it.  Within a few months of that column China and the world was engulfed by Covid19, a virus which first appeared in China, yet the country imposed the harshest of control measures and within months was returning to a normal of sorts.  When contrasted with Europe and especially America China’s model of governance appeared to have triumphed but that is all in the past.  If case counts and associated deaths is the sole measure of success, then China remains well positioned but the pandemic is a complex and dynamic system.  The virus China faced no longer circulates, its population is vaccination with relatively ineffective and short-lived vaccines and its model simply provides no guidance to other countries on how to live in what is now an endemic diseases across the world.  China’s success of 2020 has not positioned it well for the post pandemic world.  It remains tightly sealed off from the world with cross border travel virtually non-existent.

Aside from the virus though the difficult years were expected because the economic model had largely run aground.  The easy years of growth with a young and growing workforce who could benefit from WTO accession have passed.  For over a decade China has delivered smaller and smaller growth rates by pumping more and more credit and leverage into the economy.  Just look at the Huarong and Evergrande failures as evidence of that.  Despite warnings about the post-GFC credit expansion only in 2016 did the message really start to sink in at the most senior levels of Chinese leadership.  Since then there has been a series of attempts to rein in the credit expansion but with very mixed results.  Evergrande’s demise can certainly be traced to the government’s three red line policy which severely curtailed the fundraising abilities of highly indebted property companies. So why not simply change policy and pump up the credit?  They dare not to, debts are already overwhelming cities like Hegang and outside of the main centres of Beijing, the Yangtze delta, and Guangdong, provinces are swamped with debts which their limited revenues are failing to cover.

With so many economic knocks why then does China seem to be doing broadly okay?  Anecdotal stories would indicate that the clampdown on businesses are broadly supported.  Partly this is due to astute messaging by the government.    Xi Jinping, a man with a grand vision of building a rejuvenated China with the Party reigning supreme, has championed the phrase “common prosperity” to explain and justify his private sector clampdown.  His tech clampdown on monopoly or duopoly control by Chinese tech giants has certainly been popular, as has the need for better pay and conditions for gig economy delivery riders.  Indeed, such measures would be welcomed by many in the developed economies as well!  That tech companies and billionaires are now being pressured into large charitable donations is a popular measure but that can’t make up for a function and fair tax system which China fails to implement.

Clamping down on online education is well received as parents lament the pressure and cost of such services but what is less well reported on is that the underlying pressures haven’t changed at all.  The competition for good universities or civil servant exam places hasn’t gone away, and neither has parental pressure for their sole child to succeed evaporated either.  Xi has focused on tackling symptoms of the underlying problems, not addressing the problems themselves.

As the Party has now abandoned its one child policy it now hopes that families will have 2 or 3 children to boost a falling fertility rate.  The “common prosperity” measures are aimed at reducing the financial burdens on families but there is little substance there.  Even the property market clampdown is hardly driving prices down to a reasonable level for families to be adding one or two bedrooms without significant financial outlay.  No country in Asia has successfully reversed falling fertility rates and Xi’s gimmicks and slogans will do nothing to affect China’s.

Clampdown legacy

While the current messaging is working the longer-term impact of Xi private sector clampdowns will be less positive.  The tech sector has attracted the best and brightest within China and made Shenzhen possibly the best city in China.  But Xi doesn’t seem to value internet platform type tech, he would love to have world beating chip design but online games and services he sees as utilities to be regulated as he sees fit.  The change in regulatory rules, which continue to come out, will over time limit the appeal of the sector and the attractiveness to young Chinese.  As for how foreign capital responds they are still reeling from the various body blows this year.  Foreign capital has suffered two blows, one regulatory in terms of which sectors they can invest and where those companies can then list but then a second blow which could be termed business regulation, i.e. will the Chinese government even allow companies to grow as they want in areas which the Party wants to dictate outcomes?

2021 should be the year when the China risk premium was meaningfully revised.  The past is simply no guide to the future as the rules of the game, for domestic business and for foreign investors have changed completely.  Ironically Chinese equities and bonds have continued to attract funds this year.  The Chinese yuan remains under strict capital controls and restrictions but there are enough official channels to access domestic securities that many investors are diversifying into China.  That money though can leave just as easily as it came in and Chinese leaders should not be fooled that short term portfolio flows can substitute for a good business environment.

Next year the focus is firmly on the 20th Party Congress, when it is expected that Xi Jinping will take on his third term as General Secretary of the Party.  That will demand stability at all costs and stability in China comes via control.  No one should think that Xi will ease up on his regulatory and business clampdown.  He is a man intent on dominating China: it seems that nothing is going to stop him any time soon.

フレイザー・ハウイー(Howie, Fraser)|アナリスト。ケンブリッジ大学で物理を専攻し、北京語言文化大学で中国語を学んだのち、20年以上にわたりアジア株を中心に取引と分析、執筆活動を行う。この間、香港、北京、シンガポールでベアリングス銀行、バンカース・トラスト、モルガン・スタンレー、中国国際金融(CICC)に勤務。2003年から2012年まではフランス系証券会社のCLSAアジア・パシフィック・マーケッツ(シンガポール)で上場派生商品と疑似ストックオプション担当の代表取締役を務めた。「エコノミスト」誌2011年ブック・オブ・ザ・イヤーを受賞し、ブルームバーグのビジネス書トップ10に選ばれた“Red Capitalism : The Fragile Financial Foundations of China's Extraordinary Rise”(赤い資本主義:中国の並外れた成長と脆弱な金融基盤)をはじめ、3冊の共著書がある。「ウォール・ストリート・ジャーナル」、「フォーリン・ポリシー」、「チャイナ・エコノミック・クォータリー」、「日経アジアレビュー」に定期的に寄稿するほか、CNBC、ブルームバーグ、BBCにコメンテーターとして頻繫に登場している。 // Fraser Howie is co-author of three books on the Chinese financial system, Red Capitalism: The Fragile Financial Foundations of China’s Extraordinary Rise (named a Book of the Year 2011 by The Economist magazine and one of the top ten business books of the year by Bloomberg), Privatizing China: Inside China’s Stock Markets and “To Get Rich is Glorious” China’s Stock Market in the ‘80s and ‘90s. He studied Natural Sciences (Physics) at Cambridge University and Chinese at Beijing Language and Culture University and for over twenty years has been trading, analyzing and writing about Asian stock markets. During that time he has worked in Hong Kong Beijing and Singapore. He has worked for Baring Securities, Bankers Trust, Morgan Stanley, CICC and from 2003 to 2012 he worked at CLSA as a Managing Director in the Listed Derivatives and Synthetic Equity department. His work has been published in the Wall Street Journal, Foreign Policy, China Economic Quarterly and the Nikkei Asian Review, and is a regular commentator on CNBC, Bloomberg and the BBC.