Xi Jinping bets on China’s economic turmoil to continue tough reforms

Chinese President Xi Jinping appears to be launching an economic storm on his own as one of China’s biggest developers is on the verge of bankruptcy and manufacturers grapple with power shortages across the country .

But aside from minor course corrections, analysts and government advisers expect Xi to use what he called a “window of opportunity” to move forward with difficult structural reforms.

If successful, it will be the latest in a long line of bold political bets – from removing term limits for the presidency to his pursuit of “common prosperity” – which have made him the most feared leader. from China since Mao Zedong. It also put him on the cusp of an unprecedented third term at the 20th Chinese Communist Party Congress at the end of next year.

Common prosperity is particularly risky, as Xi’s determination to curb house prices and reduce income inequality could do more harm than good to the world’s second-largest economy.

“Xi is preparing for the congress,” said Henry Gao, Chinese expert and law professor at Singapore Management University. “He wants people to remember him for a lot of things, but mostly to achieve common prosperity. [His predecessors] have succeeded in getting China on the fastest bullet train for economic development, but have done little for common prosperity.

Next week, the National Bureau of Statistics will release its estimate of third-quarter economic growth and other important economic indicators. The data will provide the best indication of the impact of the crisis on Evergrande, the second-largest Chinese developer with more than $ 300 billion in liabilities, and power shortages caused by factors such as soaring coal prices and new strict environmental targets.

As a result, many forecasters are downgrading their annual economic projections for the Chinese economy. But most still believe that economic output for the full year will far exceed the government’s official growth target of 6% in 2020.

At a party’s political bureau meeting in April, Xi said the relatively strong recovery in China’s economy after the Covid-19 pandemic offered a “window of opportunity” to reduce financial risks, especially in heavily indebted sectors such as real estate. It was also an opportunity to pursue ambitious environmental objectives such as reaching a peak in carbon emissions by 2030 and carbon neutrality by 2060.

Rosealea Yao, analyst at Gavekal Dragonomics in Beijing, noted that in August, sales of Chinese properties were on track to reach 1.8 billion m² for the whole year, compared to an annual average of 1, 7 billion square meters from 2017 to 2019. With rising sales and prices threatening Xi’s common prosperity agenda, officials were more willing to take risks with Evergrande when he began to miss payments to retail investors and bondholders in September.

However, many analysts warn that the Evergrande debt crisis could have a much bigger impact on the Chinese economy than Xi and his economic advisers realize as they try to convince investors that Beijing will not give up its efforts to discipline a sector estimated to represent up to 30 percent of total production.

Bond yields issued by other highly leveraged Chinese real estate developers are rising and demand for additional debt could collapse, potentially sucking them into the Evergrande vortex.

“They want to scare the market to eliminate moral hazard,” said Michael Pettis, a Chinese financial system expert at Peking University. “Evergrande is in danger of getting out of hand as people change their behavior to protect themselves, which makes perfect sense. But as people always do, it really gets stronger and makes things worse. “

The city of Evergrande in Wuhan

Analysts have warned that the Evergrande debt crisis could have a much bigger impact on the Chinese economy than Beijing thinks © Getty

A Chinese government policy adviser, who asked not to be identified, said recent asset sales by Evergrande to raise funds were molehills against the backdrop of its global mountain of liabilities, estimated at $ 305 billion. . If it is pushed too far too quickly, the group could be forced to sell its vast land portfolio.

“The fire sales of Evergrande land reserves could drive land prices down in many parts of the country, which would be quite frightening,” the adviser said. In this case, he added, “the only viable solution might be to gradually nationalize the entire real estate sector“.

The electricity shortages that have cascaded across China in recent weeks are an example of how well-intentioned policies can have unintended consequences.

Some of these consequences stem from production cuts in provinces struggling to meet strict year-end energy efficiency targets. Factories in other regions have been affected by coal shortages, soaring coal costs and power price caps, meaning they can only produce electricity at a loss. Chinese coal futures reached record highs on Monday after a major coal-producing region was hit by flooding.

An owner of a plastics factory in eastern Jiangsu Province, who requested anonymity, said he was only given last-minute notice of the power cuts that began in mid-September. “There was no clear long-term plan from the government,” he said. “Companies must anticipate. “

Late last week, the Xi administration attempted to improve the situation by ramping up coal production and allowing factories to charge more for their electricity. But these short-term concessions are unlikely to deter Beijing from pursuing its ambitious longer-term environmental goals.

“We understand and support the government’s environmental policies,” said the owner of the plant. “The government sees a bigger picture than us and has carbon reduction targets to achieve. But cutting ourselves off so abruptly causes a lot of pain.

Additional reporting by Xinning Liu in Beijing

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