China’s commendable crisis management
China is currently facing crises on three fronts simultaneously. A number of Belt & Road Initiative (BRI) projects are being canceled around the world. Second, the gigantic real estate company Evergrande is sinking into a financial crisis. Third, Chinese industries and cities are facing blackouts. These crises are in fact a path to success.
The genesis of the BRI lies in the export and savings surpluses garnered by China. China needed a way to invest this money, just as we often invest our savings in stocks or properties. China has decided to invest these funds in infrastructure projects around the world. These projects served the geopolitical goal of countering American domination. They have allowed better access to Chinese exports around the world and profits for Chinese construction companies.
A 2019 World Bank study found that countries like Kazakhstan and Poland were able to establish manufacturing centers along the rail route from China to Europe. The reduction in transport costs has benefited both consumers and producers. In fact, India needs to think about building a China-India rail line given our huge trade with that country.
However, China is not immune to bureaucratic boondoggles. A number of BRI projects have been mired in inefficiency and corruption, resulting in backlash in host countries. The pro-BRI Progressive Party in the Maldives recently lost to the anti-BRI Maldivian Democratic Party. Malaysian Prime Minister Mahathir Mohammad called the BIS a form of “new colonialism”. Myanmar canceled the Kayukpyu port project. Nepal and Pakistan have called for some projects to be redesigned. The fundamental problem is that many projects are not economically viable and are likely to impose a heavy debt burden on host countries.
Thus, we have two contrary indications on the BIS. On the one hand, it should bring benefits to a large number of countries like Kazakhstan and Poland. On the other hand, it is meeting resistance in a number of countries. There are two ways to go from here. The BRI will move forward in a lean form if China reviews contested projects and only proceeds with those deemed viable. Otherwise, the BIS could collapse if China pushes on unsustainable projects. The problem with the BIS is not structural. The problem lies in a faulty implementation which can be rectified.
The second crisis is that of the gigantic real estate company Evergrande. This crisis was precipitated by the philosophy of Li Jinping. He put the problems of pollution, inequality and financial instability above corporate interests. He took steps to prevent excessive borrowing by private companies that could endanger China’s financial system. The Chinese government recently implemented a policy whereby a company had to cross each of the three “red lines” to borrow from banks: (1) Assets had to be greater than borrowings; (2) Cash reserves must be greater than short-term loans; and (3) The ratio of total debt must be reasonable to share capital. It turns out that Evergrande cannot cross all three red lines and can no longer borrow from banks. At the same time, the Covid crisis led to a drop in sales of her properties and she was unable to repay her loans. As a result, Evergrande was forced to sell some of its assets to overcome the financial crisis. The Chinese government has asked its public sector companies to buy out the stressed properties of Evergrande, much like the PSUs buying the Yes Bank and the stressed assets of IL & FS.
It should be noted that the Chinese government has decided not to bail out Evergrande by providing loans to overcome the crisis. This policy is against followed by the American government. He gave loans to the government to bail out the equally gigantic General Motors Company in the aftermath of the 2008 crisis. China, on the contrary, proactively precipitated the crisis by banning banks from lending to heavily indebted companies like Evergrande and avoid a collapse. As a result, Evergrande is forced to sell some of its assets and could become lean and sustainable in the long term. The current crisis is a surgical operation performed by the Chinese government to force Evergrande to correct its course.
The third crisis facing China is that of power cuts. As said above, Li Jinping put the problems of pollution, inequality and financial instability above the interests of companies. The Chinese government has cracked down on polluting thermal power plants in order to implement this policy. Many power plants have been forced to close. Reduced energy production. Power companies have had to ask a number of large, energy-intensive industries to shut down in order to provide electricity to homes. Yet a number of cities have been plunged into power cuts. The thing to note is that this is not an economic crisis. In fact, this is a crisis proactively provoked by China because power plants did not meet specified pollution standards. Recall that the industries of the Ganges watershed were also forced by our government to clean up by asking them to stop production.
Unlike India, the pace of solar and wind energy development has been slow in China. I expect the development of these clean energies to help China overcome the current energy crisis and also control pollution in a few years.
The conclusion is that the cancellation of economically unsustainable projects under the BRI will allow the initiative to be reborn into a new lean avatar that can be beneficial for host countries, China and the world. The sale of distressed assets by companies like Evergrande will prevent China from dealing with a crisis like Lehman Brothers in the United States in 2008. A faster pace of solar and wind energy development will help China emerge as a cleaner country and will add much more to the GDP by ensuring an improvement in the health of its population.
There is a lesson here for India. Grapevine says the Indian government is giving largesse to a few business houses, unlike the Chinese government which is resigning Evergrande. The Indian government has repeatedly looked the other way when it comes to pollution, for example by lowering air pollution standards from thermal power plants and diluting the provisions of the Environmental Protection Act, unlike to China, which forces polluting factories to close. While China is taking steps to prevent crises, India is taking steps to plunge into crises.
(The author is a former professor of economics at IIM, Bangalore)
(The opinions expressed in this column are those of the author. The facts and opinions expressed here do not reflect the opinions of The Hans India)