Takeover of the economy in China

5th October 2021
-IAM, News

Hugues Chevalier, Economist

In China, the struggle against monopolies and the state-party takeover of large companies continues. Indeed, after Deng Xiaoping’s four decades of “get rich first” policy, President Xi Jinping took a 180-degree turnover under the slogan of “common prosperity”. It is not only the new technologies sector which is concerned, but also other sectors such as real estate, healthcare, etc. In addition, almost daily new “regulations” are published banning for example online games for children, cracking down on fan club culture, and so on. The common goal of all these measures is material and spiritual “common prosperity”. While the means to achieve this may seem questionable, the fact remains that China is one of the most unequal countries in the world. Indeed, the richest 1% holds nearly 31% of the country’s wealth and 225 million people live on less than USD 5.50 a day. Moreover, the accelerated aging of the population requires a transfer of purchasing power to the middle classes to support consumption in the medium term. To achieve this, the Chinese authorities have not chosen the same tools as the industrial countries do, namely fiscal, budgetary, social policy or pensions levers. Indeed, for the moment only private companies and the richest people are the targets of “wealth sharing”. Nevertheless, in several sectors, the application of these measures is far from useless given the situations of monopoly and the total absence of competition. Particularly in the financial sector, the new rules should allow better control of credits, as in the case of AliPay, to avoid the excessive indebtedness of recent years. However, in the case of Evergrande, these measures appear to be late. Indeed, with liabilities exceeding USD 300 billion and a debt of over USD 90 billion, this major player in the real estate sector could be declared bankrupt in the coming weeks and trigger a domino effect on the entire financial sector. This is obviously what the Chinese authorities want to avoid at all costs, and have now no other choice but to bring these companies and their leaders under control.