Until recently, however, it seemed that China was recovering the fastest from the economic decline caused by the pandemic. International Monetary Fund predicts that the local economy will grow by 1.9 percent in 2020. This is at least for the last forty years, but it is a significantly better result compared to other world powers. By comparison, the United States’ gross domestic product is expected to decline by 4.3 percent for the full year.
In recent weeks, however, Beijing’s favorable prospects have begun to collapse. At the turn of November and December, a number of large state-owned companies declared bankruptcy or inability to repay debts. “This applies to almost all major sectors of the economy – raw material processing, mechanical engineering, electrical engineering – and Chinese state-owned enterprises are often large conglomerates that operate in addition to their core business in other areas where they can monetize privileged access to offices, typically real estate.” confirms Jiří Hudeček, sinologist from Charles University.
These include coal miners Yongcheng Coal & Electricity Holding Group and Huachen, whose subsidiary Brilliance Auto is a BMW partner. The latter company has owed seventy Chinese and foreign banks in the amount of around 110.5 billion crowns since last year.
–
–
Shares of state-owned enterprises reacted sharply, as did corporate bond prices. Creditors’ interest rates, on the other hand, have risen. According to CNN, the whole fact is alarmed by the fact that these companies have close relations with the Chinese communist government and have always been considered safe ports in times of crisis. If investors turn away from them, it signals that the state may no longer be interested in rescuing them. At the same time, the prosperity of the public sector is crucial for the entire Chinese financial system.
“The high indebtedness of Chinese semi-state companies is a long-standing problem,” explains Pavel Sobíšek, Chief Economist of UniCredit Bank. “The growth of the Chinese economy has been financed for many years by so-called soft loans, often linked to the public funds of individual cantons. Many economists point out that the efficiency of such financial flows is declining over time, ie that more and more debt is needed to achieve the same rate of economic growth, “he adds.
According to Sobíšek, the pandemic did not change the growth model of the Chinese economy, but shed more light on its weaknesses. It is not yet clear how the Chinese leadership will react to the problem. Beijing has traditionally enjoyed control of its business, and Chinese President Xi Jinping called for a stronger and more dominant state sector in the fall, but now it seems that at least some of these companies will be let down by the government.
–
–
Whatever the decision, however, analysts agree that high indebtedness and the associated difficulties may slow economic growth after the coronary crisis. “Although it may not derail China’s economic recovery overnight, it will slowly weaken the recent recovery,” said Julian Evans-Pritchard of the British consulting firm Capital Economics. It thus comes across this year’s steps of the Chinese government, which reduced interest rates and in the spring provided companies with a financial injection of approximately 10.8 trillion crowns.
Given the size of the Chinese economy, its problems pose a threat to the rest of the world. Although, as Sobíšek points out, “the risk is mitigated by the fact that it is one of the most closed economies in the world.”
– .
