Shopping Product Reviews

The five weaknesses that threaten China

An opinion of Céline Boulenger, macroeconomist at Degroof Petercam.

China managed the pandemic well, and managed to get out of it quickly by significantly limiting both human and economic damage. However, many weaknesses that had already existed for a few years have been exacerbated by the pandemic.

Social inequalities

The problem of social inequalities is not new since in 2013 China was one of the most unequal countries in the world (the richest 1% held more than a third of the wealth). Statistics have improved since then, but inequalities are expected to return due to the pandemic. The incomes of migrant workers fell in the first half of 2020, as did the incomes of the poorest families, as the richest saw their livelihoods increase. One of the reasons for the increase in inequalities is the lack of social assistance, such as unemployment assistance present in Europe. All the more so as public aid has mainly benefited businesses in urban areas, to the detriment of more vulnerable communities in rural areas. On the one hand, 2020 was the best year in 22 years in terms of increased wealth for the better-off (thanks to market performance as well as a wave of new IPOs), and on the other hand, households are increasingly in debt (almost 60% of GDP).

Financial weaknesses

The containment measures have not only increased inequalities, they have also been accompanied by a wave of flaws. Indeed, the fiscal stimulus which helped to minimize the impact on companies also increased their indebtedness. A debt that grew by 25% (of GDP), the biggest increase since 2009. A trend that worries since private debt was already extremely high. In addition, banks have so far succeeded in limiting the damage thanks to easy access to credit. However, that luck might turn when policies become more restrictive.

State domination

Especially since it is mainly state enterprises that find themselves in the hot seat. Between January and October, the latter defaulted by a value of $ 6.1 billion, more than the defaults reported for the previous two years. China’s economic system is heavily dependent on these state-owned enterprises, which are responsible for half of the loans in China and about 90% of corporate bonds. The government protects these companies which benefit from astronomical public aid, preventing private companies from competing. Today, this unbalanced system which favors state enterprises is in danger, since they are in debt like never before.

Improved statistics

Another flaw in the Chinese system: the lack of transparency. The Chinese government has a reputation for manipulating certain statistics to its advantage, including those related to economic growth. Experts have been doubting official data for years and this is impacting investor confidence as well as the rest of the world’s image of the Chinese economy. This falsification of statistics is partly linked to the growth targets set by the central government each year, as local authorities are judged on their ability to meet or exceed these.

Carbon economy

A final major vulnerability is dependence on fossil fuels. In fact, 60% of energy production still comes from coal-fired power stations. And this dependence will continue as new plants are being built. Yet China has just announced that it will achieve carbon neutrality by 2060, a goal that will be impossible if huge changes are not put in place. In the coming years, China will therefore have to review its way of producing and consuming in order to set up an economic system that is part of the ecological transition.

China has been covered in flowers for its handling of the pandemic and the economic crisis that followed. However, this recovery must be taken with a grain of salt since it hides significant weaknesses. China’s economy is expected to experience impressive growth this year, however, the government will need to take into account the vulnerabilities mentioned above for it to be sustainable.

Leave a Reply

Your email address will not be published.

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1