The Three Big
Mistakes China Made in 2020
For the many things Beijing did right this year, it still
got a few important things wrong.
By Shuli Ren
December 29, 2020, 6:00 PM EST
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets.
Even if you resent China for being the epicenter of
Covid-19, you’ve got to admire Beijing’s leadership skills. Less than a year
after the pandemic erupted, life is back to normal, while Europe and the U.S.
are still struggling. The country is now the world’s shining economic outlier.
Many good things can be said about China. Wearing a mask
isn’t a political debate. Bureaucrats take virus testing so seriously that some
measures go overboard. The central bank resisted the temptation to take the
cheap, zero-rate shortcut to boost the economy, and is opening financial
markets. No wonder yield-hungry foreigners are buying Chinese assets at a
record pace, despite angry objections from U.S. President Donald Trump.
But there’s always room to improve. Come January, there will
be a more rational occupant of the White House, which will give China the space
to focus on structural reforms. And it’s here I’d like to raise some quibbles
with Beijing, because for the thousand things it did right this year, it got
three big things wrong.
Underestimating the
K-Shaped Rebound
Just months into the pandemic, the world quickly realized
the myriad ways Covid-19 was exacerbating income inequality. Large technology
companies and their employees, who could work from home, were flush with cash,
while storefront businesses were forced to close.
As early as April, when China first emerged from lockdown, small restaurants were starting to
voice their complaints about the exclusive arrangements food-delivery
super-apps asked them to sign, forcing them to choose one platform over
another, and the exorbitant fees they charged. These apps threatened the
recovery of the hotel and catering industry, and the livelihood of its workers.
The sector, which didn’t fully bounce back until October, employed as many as
33 million people last year.
Yet Beijing didn’t start to address this economic imbalance
until mid-November, when it published a vaguely worded, 22-page document
on antitrust regulations aimed at reining
in the country’s tech giants. On Christmas Eve, in a one-sentence
statement, the State Administration for Market Regulation said Alibaba Group
Holding Ltd. was under investigation for the so-called “pick one out of two”
practice. Alibaba’s shares are down 28% from their October high.
The K-shaped rebound shouldn’t have come as a surprise: The
macro statistics gave plenty of cues. Manufacturing bounced back quickly, while
retail sales, a barometer of broader consumer confidence, lagged for months.
Luxury items were doing well, with high-end cars selling fast and the likes of
Chanel and Louis Vuitton raising prices.
In the U.S. and elsewhere, consumer confidence has been
partially shielded from the Covid-19
recession thanks to stimulus checks and augmented unemployment benefits. China,
on the other hand, took a page from its
2008 playbook, revving up the economy by building new bullet trains and
5G telecom stations.
Over 170 million
migrants live and work in China’s cities, mostly in the construction,
manufacturing and services sectors. During the pandemic, they not only lost
their jobs, but didn’t get to collect unemployment checks. As far as Beijing was concerned,
they weren’t jobless; they could always go home to farm. China went for
trickle-down economics.
The decision to aid
business owners over workers may have stemmed from the government’s
obsession with control. While Beijing feels it can tell factories to run their
machines at full speed, households may just stash away their stimulus checks.
Businesses have a higher marginal propensity to spend.
Was this fiscal recipe wise? China has been eager to
transform into a consumer society,
because an economy that relies on industrial production is vulnerable to global
business cycles. The lack of a social
safety net, however, may have permanently dented household confidence.
China’s old-fashioned stimulus is setting back its own economic goals.
Muzzling Billionaire
Critics
Even as Americans flooded the polls to choose their new
president, China found a way to steal the show. On Nov. 3, it suspended the $35
billion public listing of billionaire Jack Ma’s Ant Group Co. — just two days
before the fintech’s trading debut.
The bright side of gridlock in Washington is strong
investment case for China: a weaker dollar, which makes its currency more
attractive; a sovereign bond yield differential at a record high; and a wave of
mainland unicorns going public. But the sudden
antics pulled with Ma can unsettle even the savviest investors.
In a terse statement announcing its decision, the Shanghai
Stock Exchange cited regulatory changes and Ant’s inability to fulfill listing
conditions. Beijing has a point. During Covid-19, consumer credit was expanding
too fast, and abuses, such as predatory interest charges and misuse of tenants’
prepayments, became a social issue. On Dec. 27, the central bank said in a
published Q&A that Ant has “little legal awareness” and asked the fintech
giant to return to its core, less-lucrative digital payment business. To
China’s credit, bureaucrats have been debating how to regulate Ant’s lucrative
lending business for at least two years.
Yet the timing was suspect. What captivated a global
audience was a suspicion that China pulled the IPO not because of regulatory
changes, but because of a blunt speech Ma made in Shanghai two weeks earlier.
In it, he criticized China’s broken financial system, saying banks were like “pawn shops,” where only those with
collateral and guarantees could get loans. President Xi Jinping, who read
government reports about the speech, was reportedly furious.
No doubt, Ma loves the limelight, singing and dancing on big
stages. Still, what he said wasn’t wrong.
In fact, China’s own central bankers have taken the same policy positions – and
even used the same words. It just came out of the wrong mouth.
The Ant fiasco thus becomes a fine reminder that Beijing bureaucrats tend to forget how to govern when they feel they have lost face. Assumed standards can be
tossed at whim.
It’s also a lesson to billionaire businessmen: Don’t be
blunt and don’t criticize the government, just bury your head and make money
quietly. After all, China Evergrande Group’s chairman Hui Ka Yan, who turned
his real estate business into the world’s most indebted developer, still
manages to survive, even though his company poses a systemic risk to the
banking sector. In October, Hui laid low when Xi snubbed him during a visit to
Shenzhen. A month later, the Shenzhen government gave him a lifeline. Ma, on
the other hand, is still nursing the billions of dollars lost from his loose
lips.
After four years of incessant berating from Trump, China may no longer care about
public relations. But it does want
foreign money to help finance its own fiscal deficits. The untimely
Ant fiasco puts all that at risk.
Mishandling Defaults
There’s a persistent perception that rules in China run on a
dual track: Private-sector businessmen get summoned and dressed down by
government officials whenever they cross the line – as Jack Ma witnessed in
November. Meanwhile, state-affiliated entities can sit cozy, with plenty of
local resources at their command.
An ugly wave of defaults
among state-owned enterprises is only further evidence of this trend.
Pinched by oversupply and dwindling profit margins, SOEs
started to default here and there as early as 2015. Yet the latest wave, which
began in September – after China’s economy bounced back from the Covid slowdown
– was the first batch to test marketplace rules. The few that missed
repayments are the biggest SOEs in their regions.
A default on its own is unpleasant, not unacceptable – this
is a risk bond investors are prepared to take. But now there is a deepening suspicion that SOEs will move
good assets out before creditors drag them to court. In less than one
month, three unrelated companies – an
auto giant in the northeast Liaoning province, a coal miner in the
affluent central Henan province, and a chip manufacturing powerhouse – shifted
their subsidiaries’ stock holdings out before defaulting. That makes a pattern.
For years, Beijing has been trying to break the notion of
implicit guarantees – that is, the belief that the government will step in to
bail out any SOE. This is for good reason: Loss-making ones somehow get AAA
ratings, and there’s not enough credit spread in China’s $4 trillion corporate
bond market to differentiate between quality and riskier assets.
But Beijing must apply the same rules universally. If a
private-sector real-estate developer defaults, its creditors could get some
land bank back for consolation. Will investors be able to carve off an SOE’s
assets when these businesses go bust?
The first look isn’t
good. China’s regulators have been beating around the bush, punishing
bond underwriters and nudging local governments to make empty promises instead.
So while SOEs are less likely to default – thanks to their
local connections, they tend to be more resourceful with financing – they’re
quite capable of shielding core assets from their creditors after missing
repayments.
This is another mistake, because foreigners would have
happily bought SOEs’ yuan-denominated bonds, which pay higher coupons than
their offshore dollar issues. This year, portfolio inflows have been so strong
that foreigners are promising to
take over city commercial banks as the second largest buying bloc of government bonds. They have largely
stayed away from the corporate bond market, which is known to be a
playground of SOE entities. The latest defaults only give them more reason to
sit on the sidelines.
President Xi has always been a reformer, keen to upgrade
China’s economy and rid the system of excess debt. For the past few years,
Trump’s trade war and Covid-19 derailed him. Now that both roadblocks are gone,
he can get back on track.
Yet China needs to update its approach. Sticking to a 2008
fiscal playbook feels antiquated, particularly compared with the “run-it-hot”
strategies in the U.S. To establish a functional marketplace, China needs to dismantle the two-track
system the state and the private sector run on. It also needs to give
successful billionaire businessmen a forum to make policy recommendations. They
know what’s happening on the ground better than anyone sitting in a government
building. Sure, a private citizen’s comments can be hard to swallow, but as our
ancestors like to say, bitter medicine is good for your health.
This column does not necessarily reflect the opinion of the
editorial board or Bloomberg LP and its owners.
To contact the author of this story:
Shuli Ren at sren38@bloomberg.net
To contact the editor responsible for this story:
Rachel Rosenthal at rrosenthal21@bloomberg.net
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