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Xi Jinping gambles on China’s economic tumult to press ahead with tough reforms

Chinese president Xi Jinping appears to be sailing into an economic storm of his own making, as one of China’s largest developers teeters on the edge of bankruptcy and manufacturers grapple with power shortages across the country.

But aside from minor course corrections, analysts and government advisers expect Xi to take advantage of what he has termed a “window of opportunity” to press ahead with difficult structural reforms.

If successful, it will be the latest in a long series of bold political gambles — from the elimination of term limits on the presidency to his pursuit of “common prosperity” — that have made him China’s most feared leader since Mao Zedong. It has also put him on the cusp of an unprecedented third term in power at the Chinese Communist party’s 20th congress late next year.

Common prosperity is particularly risky, as Xi’s determination to rein in property prices and reduce income inequality could do more harm than good to the world’s second-largest economy.

“Xi is warming up for the congress,” said Henry Gao, a China expert and law professor at Singapore Management University. “He wants people to remember him for many things, but especially for achieving common prosperity. [His predecessors] were able to get China on the fastest speed train for economic development but didn’t do much for common prosperity.”

Next week the National Bureau of Statistics will release its estimate for third-quarter economic growth and other important economic indicators. The data will provide the best indication of the impact from the crisis at Evergrande, China’s second-largest developer with more than $300bn in liabilities, and power shortages sparked by factors including a surge in coal prices and strict new environmental targets.

As a result, many forecasters are revising downwards their full-year economic projections for China’s economy. But most still estimate that economic output for the full year will comfortably exceed the government’s official growth target of 6 per cent over 2020.

At a meeting of the party’s politburo in April, Xi said the Chinese economy’s relatively strong recovery from the Covid-19 pandemic provided a “window of opportunity” to reduce financial risks, especially in heavily indebted sectors such as real estate. It was also a chance to pursue ambitious environmental goals such as achieving peak carbon emissions by 2030 and carbon neutrality by 2060.

Rosealea Yao, an analyst at Gavekal Dragonomics in Beijing, noted that as of August Chinese property sales were on track to hit 1.8bn sq m for the full year — compared with an annual average of 1.7bn sq m from 2017 to 2019. With surging sales and prices threatening Xi’s common prosperity agenda, officials were more willing to take risks with Evergrande when it started to miss payments to both retail investors and bondholders in September.

Many analysts, however, caution that Evergrande’s debt crisis could have a much larger impact on the Chinese economy than Xi and his economic advisers realise as they try to convince investors that Beijing will not abandon its effort to discipline a sector that is estimated to account for as much as 30 per cent of total output.

Yields on bonds issued by other highly leveraged Chinese property developers are rising and demand for additional debt could collapse, potentially sucking them into Evergrande’s vortex.

“They want to scare the market as a way of eliminating moral hazard,” said Michael Pettis, a Chinese financial system expert at Peking University. “Evergrande has the risk of spiralling out of control because people are changing their behaviour to protect themselves, which is perfectly rational. But as people do that systematically, it’s really self-reinforcing and makes things worse.”

The Evergrande city in Wuhan
Analysts have cautioned that Evergrande’s debt crisis could have a much larger impact on China’s economy than Beijing realises © Getty

A Chinese government policy adviser, who asked not to be identified, said recent asset sales by Evergrande to raise cash were molehills in the context of its overall mountain of liabilities, estimated at $305bn. If pushed too far too quickly, the group could be forced to sell down its vast land bank.

“Fire sales of Evergrande’s land reserves could drive down land prices in many areas of the country, which would be quite frightening,” the adviser said. In that case, he added, “the only viable solution might be to gradually nationalise the whole real estate sector”.

The power shortages that have cascaded across China over recent weeks are an example of how well-intentioned policies can have unintended consequences.

Some of those consequences have stemmed from production cuts in provinces struggling to meet strict year-end energy efficiency targets. Plants in other regions have been affected by coal shortages, soaring coal costs and electricity price caps, which mean they can only generate power at a loss. On Monday Chinese coal futures reached record highs after a big coal-producing region was affected by flooding.

An owner of a plastics factory in eastern Jiangsu province, who asked not to be named, said he received only last-minute notice of power cuts that began in the middle of September. “There was no clear long-term plan from the government,” he said. “Businesses need to plan ahead.”

Late last week, Xi’s administration tried to ameliorate the situation by accelerating coal production and allowing plants to charge more for their electricity. But these short-term concessions are unlikely to deter Beijing from pursuing its ambitious longer-term environmental goals.

“We understand and support the government’s environmental policies,” the factory owner said. “The government sees a bigger picture than just us and has carbon reduction targets to hit. But cutting us off so abruptly causes a lot of pain.”

Additional reporting by Xinning Liu in Beijing

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