The spread of the COVID-19 has wreaked havoc on China’s economy, and real estate behemoth Evergrande is on the edge of bankruptcy, adding to a catastrophic power deficit across the country.
The COVID-19 situation may improve more in the following months, but the other two issues will persist and are more likely to worsen despite the government’s efforts.
Increasing COVID-19 the cause of an economic recession
The latest figures on China show that the country’s economy is in recession. The critical metrics for both industry and services for August speak for themselves.
It is easy to see that China’s economic slowdown came from the increase in COVID-19 cases in early summer and the subsequent blockades implemented under the “zero tolerance” policy of the epidemic, also called the Beijing disease.
A sensitive measure of economic activity—in China as in other countries—is the purchasing manager’s index (PMI). This indicator shows that the Chinese economy had a bad August.
Even the ‘always upbeat’ official figures from the Beijing government say the same thing.
For August, the manufacturing PMI was 50.1, which is 0.6% down from July and is now 3.5% lower than at the beginning of the year.
Technically, 50.1 is still in the growth zone, but any observer must admit that the line between growth and recession is too thin.
Meanwhile, figures from other institutions show an apparent slowdown in China’s economic activity. Manufacturing PMI obtained from the independent Caixin/Markit survey is 42.9, deeply in the recession zone, and down 7.2% from the level recorded at the beginning of the year.
The developments in the service sector were even more severe. Official Chinese government PMI figures show a decline. This number is 47.5, down 10.9 percent from July.
Whether or not a ‘zero-tolerance policy is wise is up for debate, but there can be little doubt about the consequences for the economy.
Of course, there’s every reason to believe that these negative impacts will fade away if the limits are gone, but China’s other issues aren’t going away anytime soon.
Evergrande is one of China’s biggest private-sector conglomerates, with more than 200,000 employees, 1,300 projects in 280 cities, and assets of 2.3 trillion yuan ($350 billion). It owes creditors some 2 trillion yuan ($310 billion)
Evergrande Group has the possibility of defaulting up to 835.5 billion yuan ($123.8 billion) related to 171 financial institutions, including banks and trust companies. Large-scale cross defaults also led to systemic economic turmoil.
8441 upstream and downstream businesses will be affected by this incident, leading to bankruptcy and weakening the national economy.
Evergrande’s 792 ongoing real estate projects will be affected, threatening the lives and finances of 2 million homebuyers; 3 million people will lose their jobs.
Twenty of China’s 23 provinces have had to close many factories and apartment complexes because of a lack of electricity. The CCP does not provide statistics on the exact number of kilowatts missing.
Beijing is part of the reason for this problem. China is Australia’s largest coal importer— accounting for 27% of its metallurgical coal and 20% of its thermal coal. But for diplomatic reasons, Beijing has banned imports of Australian coal, the primary source of fuel for the country’s generators.
At the same time, Beijing’s pledge to reduce its economy’s carbon footprint has shut down or severely reduced much of its domestic mining operations, left power plants struggling to replace coal of Australia.
Meanwhile, alternative energy renewable solutions have been in short supply. Wind power production had increased by just 7% from 24.5% last year, and drought has reduced hydropower output by about 4%.
There are many other complications, such as increased fuel demand from a recovering global economy and President Biden’s decision in the United States to cut mining operations, which has increased fuel costs everywhere.
With coal prices up about 40 percent year-on-year and oil prices up about 95 percent, some Chinese manufacturing operations have become unviable even if they could get energy.
Power shortages have hampered China’s ability to meet delivery deadlines. The unreliability has worsened, prompting these Japanese and Western buyers to look for alternative sources of supply. Even when China has overcome its electricity shortage, these initiatives will continue.
A series of issues have become a major test of China’s leadership. China’s economy and finance are at a turning point.