Over the past 10 years, the world has grown used to China’s status as an economic powerhouse with high GDP growth. China is also an emerging financial superpower as it liberalises its financial markets. This confidence was badly shaken in 2021.
Chinese economic growth has steadily declined over the past 20 years. This trajectory is not dissimilar to that experienced by other Asian economies (Japan, Taiwan and South Korea). As a country industrialises and gets richer, the pace of economic growth tends to decline over time as some of the early gains become difficult to replicate. The concerns with China are not about shorter term, cyclical economic weakness but the longer term direction of the country.
The trigger for investors’ re-assessment of Chinese economic growth started with the crackdown on the internet sector in mid-2020, triggered by official sanctions against the un-authorised US listing of Didi, China’s home grown rival to Uber. This quickly morphed into a high profile public campaign against the Chinese internet giants, including Alibaba and Tencent. The campaign comprises organised public vilification of the targets’ business practices, followed by harsh financial penalties and regulations which render existing business models un-operative. Private education, entertainment and media industries also came under this regulatory driven purge. Several leading business personalities, such as Jack Ma, were effectively removed from managerial positions. In many cases, prominent businessmen voluntarily donated significant proportions of their wealth to charities.
Investors’ confidence in China was already brittle when two further blows arrived in September. China Evergrande Group, a massive property developer, defaulted. The Chinese property sector has been weak since mid-2020 as the government tried to moderate the rise in house prices. China Evergrande Group’s problems have led to financial difficulties with other property developers and renewed downward price pressure. The property sector is critical, contributing as much as around 28% to Chinese GDP and is the main store of wealth for the Chinese people. Land sale is also a significant revenue contributor to local governments which are the drivers behind another growth engine – infrastructure spending.
China also experienced an energy crunch, when energy shortages led to rationing of electricity in many parts of the country, including the coastal provinces which are the country’s economic powerhouse. The causes of the energy crunch are a complex web of an overzealous push to reduce energy consumption at the provincial level, rigid control over electricity prices and an unwillingness to import Australian coal to meet the domestic supply shortfall. In short, a demonstration of the pitfalls of excessive control from the central government and ineffective policy making.