Policymakers increasingly saw China as a threat to the world economy. China is the world’s largest growing economy currently standing at number two and it will be no magic if its GDP tops the chart and makes it number one. American Politician and the former director of National Intelligence John Ratcliffe called China not only the “greatest threat to America” but also “the greatest threat to democracy and freedom worldwide since World War II.
Though China does not harbor Hitler‐style ambitions of extensive conquest, the Chinese government depends on the world economy for development and the consequent acquiescence of the Chinese people. Presently, Rather than rising to anything that could be conceived to be “dominance,” China could decline into substantial economic stagnation. It faces many problems, including the aging population, environmental devastation, slowing growth, enormous overproduction, increasing debt, and lacking foreign investments. Should we call it a complete demise or should we wait for them to rise again?
Evergrande’s Domino Effect:
Evergrande Real Estate currently owns more than 1,300 projects in more than 280 cities across China. The broader Evergrande Group now encompasses far more than just real estate development. Its businesses range from wealth management, making electric cars and food and drink manufacturing. It even owns one of the country’s biggest football teams – Guangzhou FC.
Why is Evergrande in major trouble?
Evergrande expanded aggressively to become one of China’s biggest companies by borrowing more than $300bn. Last year, Beijing brought in new rules to control the amount owed by big real estate developers.
The new measures led Evergrande to offer its properties at major discounts to ensure money was coming in to keep the business afloat. Now, it is struggling to meet the interest payments on its debts. This uncertainty has seen Evergrande’s share price tumble by around 80% this year. Its bonds have also been downgraded by global credit rating agencies. Banks have reportedly declined to extend new loans to buyers of uncompleted Evergrande residential projects, while rating agencies have repeatedly downgraded the firm, citing its liquidity crunch.
Some of the major foreseen effects due to this dissolution-
- The experts have warned of a potential “Domino Effect” on the world’s economy once this real estate giant dissolves. This clash down of real estate giants will majorly cause a deep hole in the real estate market of China which is a huge sector of the economy.
- Equity markets fell and the price of Bitcoin slid on bankruptcy fears for China Evergrande Group. The price of Bitcoin had crashed by 10% in a 24-hour span to $42,500.
- “Even if it were the first of many property developers to go bust in China, we suspect it would take a policy misstep for this to cause a sharp slowdown in its economy and a major spill-over on the world’s economy”.
China’s Coal Crunch
China’s coal crunch is a much bigger concern than Evergrande bankruptcy. The world’s 2nd biggest economy is all grappling with a power cut which is not only going to impact their industrial output but will be a great struggle for China’s residential people. China’s powerful state planner comes to a collision as the biggest source of power comes to a massive crunch.
Looking at the domestic coal situation first, it’s clear that supply has become an issue in 2021. While the big-picture gain of 4.4% over the first eight months of the year to 2.6 billion tonnes doesn’t seem too bad, the detail shows that production has been in a downward trend for most of the year, reversing only in August. Production did recover to 335.24 million tonnes in August, but the total so far this year is still well below China’s potential output.
China produced a record-high 351.89 million tonnes in December last year, as mines ramped up output to meet demand in a colder-than-expected winter. Since then, domestic production slumped to 314.17 million tonnes in July, the lowest since May 2019. Now, it is struggling and even fearing the winter season as its heat source is almost consumed and now they barely have enough to survive their manufacturing units and after that if they may have options, they would manage power cuts. Heat will be more than a luxury for China’s people this winter season.
Some of the major impacts due to this crunch-
- China is considering hiking industrial power prices to ease the supply crunch. The curbs also continue to affect the heavy industry, such as metal production, and manufacturers.
- This power shortage will carry huge economic and political implications. China’s growing economy is at standstill due to such a break-even in between the recovering mode of COVID-19 impact. This is going to have spill-overs on the world’s economy too.
- This curb is even making the dirtiest coal at surge. The price of a variety of lignite coal from Indonesia surged to $110 to $120 a ton this week due to rising demand from China and falling production from mines in Kalimantan.
- Some of the major companies are thinking of “switching to diesel” for running their manufacturing units. In Shenyang, staff at a steel parts factory that has been shut for the last few days said they had not yet rented a generator but might do so if rationing continued.
How is China dominating global investment?
Overseas investment offers China an opportunity to not just bolster its own economy, but also leverage its economic strength to increase its influence abroad. Driven in part by Beijing’s “Going Out” strategy and the Belt and Road Initiative, both of which encourage investment in foreign markets, Chinese firms have actively expanded their overseas footprint in a range of sectors in recent years. The Belt and Road initiative announced in 2013 aims to strengthen China’s global connectivity. As per official data for Chinese investments in the 140 countries of the Belt and Road Initiative show that overall financing and investments in the BRI in the first six months of 2021 was about US$19.3 billion. This is a decline of 32% compared to the second half of 2020 and a decline of 29% compared to the first half of 2020. It is also US$44 billion less compared to the peak in BRI financing in the second half of 2019.
China’s dominating institution and cusp economy is leading countries to bail out from receiving the investment. In fact, more recently India is set to clear 45 investment proposals from China, which are likely to include those from Great Wall Motor and SAIC Motor Corp. It is evident that about 150 investment proposals from China worth more than $2 billion were stuck in the pipeline. Companies from Japan and the US routing investment through Hong Kong were also caught in the cross-fire as an inter-ministerial panel led by the interior ministry increased scrutiny of such proposals. It is not just India which is stretching their hands back but all major countries. It is happening because of China’s forever interest in disputed lands or properties and then dominating or pressurizing the countries later for their investment’s interest rates.
India, Taiwan’s chip connection; erupting a volcano in China’s homeland
India accelerates talks with Taiwan on a $7.5-billion chip plant. They are in talks on an agreement that could bring chip manufacturing to South Asia along with tariff reductions on components for producing semiconductors by the end of the year. This chip plant to India can supply everything from 5G devices to electric cars that too at minimal prices. India is currently studying possible locations with adequate land, water and manpower, while saying it would provide financial support of 50% of capital expenditure from 2023 as well as tax breaks and other incentives.
How is India’s accelerated talk with Taiwan going to impact China’s downfall?
This fresh agreement of Taiwan with India is going to impact China’s growing economy as they are already fighting the fuel crunch, increasing debt and post pandemic era and this agreement will be an add on to their existing problems. India has everything from land, to resources, to man power- everything same as China but lacks the opportunity to gain profits from such agreements. Now that we have an opportunity in our hands, it will be a step upward to beat China’s chip industry and their unsaid rivalry with India. A report said this move could be the spark that will start fresh tension with China. Here is how it built up-
- India has sought to lure high-technology investments as it seeks to become more self-reliant on chips, while Taiwan wants to strengthen its diplomatic presence around the globe as it pushes back against the pressure from China.
- Companies like Foxconn Technology Group and Wistron Corp. ramped up in India because the nation already had an established electronics assembly business–where margins are thin and labor costs matter–and the requisite workforce from chip designers to process engineers in place.
- The discussions have accelerated in recent weeks as U.S. President Joe Biden seeks to shore up supplies of chips, strengthen supply chains among democracies and improve military capabilities in the region. Recently, he met Prime Minister Narendra Modi along with the leaders of Australia and Japan as part of the Quad meeting, a group that is countering China’s influence.
Now that everything is turning against China, they will have to dig some deep treasure to make the terms turn in favor of them. But the fact that the Chinese economy is so large is going to have multifold impacts on the world’s economy for each of its loopholes or unprecedented mishaps. Be its slower growth, increasing debt, energy crunch, losing investors, or sudden bankruptcy of its biggest real estate giant, everything has a domino effect on the world’s economy. Is the world going to cry on China’s demise?