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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 US 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 US 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 US 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.
Muzzling Billionaire Critics
Even as Americans flooded the polls to choose their new president, China found a way to steal the show. On November 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 December. 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.
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.
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.
—Bloomberg
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron’s, following a career as an investment banker, and is a CFA
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