Bloomberg
Defying Dire Predictions, China Is the Bubble That Never Pops
Tom Orlik 6/23/2020

(Bloomberg Businessweek) -- Don’t tell President Trump, but China is winning.

The U.S. has thousands of new Covid-19 cases a day. China’s reported daily case count is down to double digits. The U.S. is braced for an historic 6% contraction in gross domestic product. China’s rapid rebound means it’s poised for another year of growth—and a speedier catch-up in the race to overtake the U.S. as the world’s biggest economy. America’s international standing has seldom been lower. From the corridors of the World Health Organization to the protest-ridden streets of Hong Kong, China’s global clout increases.

For many, China’s world-beating rebound must come as a surprise. To read the history of China analysis in the last 30 years is to be bombarded with predictions of imminent demise. Sure, the skeptics conceded, double-digit growth looked impressive. But, they said, just poke beneath the surface, and the reality was an unsustainable bubble. The authoritarian political system was too constricting for the economy to truly thrive. Banks were stuffed with bad loans. The industrial landscape was littered with zombie companies, the urban landscape with ghost towns.

At first, it appeared Covid-19 would confirm that narrative. Reports about a virus contracted from bats and spread in a crowded wet market confirmed prejudices about a primitive and backward people. The story of Dr. Li Wenliang—the whistleblower who tried to alert China’s authorities but had been silenced—affirmed the superiority of the open U.S. system. Footage of mechanical drones barking “go home” at lockdown dodgers added fears about the rise of a surveillance superstate.

The lockdown hammered China’s economy. With factories closed, profits for state-owned enterprises slumped, falling close to 50% in the first months of the year. Home sales—a critical driver of China’s construction boom—plummeted. Tax revenue and land sales, which are the main source of revenue for local governments, followed them down. Workers faced rising unemployment and shrinking incomes. The official data showed the jobless rate rising above 6%. Cynics assumed the reality was worse.

In the grizzly bear narrative, the arch villain in China’s economy is debt. A four-trillion-yuan ($565 billion) stimulus that started as a powerful response to the 2008 great financial crisis ran too strong for too long. Debt for the economy as a whole rose precipitately—climbing from 140% of GDP in 2008 all the way to 260% in 2019. Everyone from International Monetary Fund policy wonks to Wall Street money managers to China’s own communist cadres were warning of a dangerous bubble.

The biggest borrowers—state-owned enterprises, real estate developers, local governments—were the very same groups that were now facing plunging incomes as Covid-19 swept through the economy. Surely the day of reckoning was nigh.



For some in the Trump administration, it seemed like a good moment for a victory lap. China’s outbreak would “accelerate the return of jobs to North America” said Wilbur Ross, the commerce secretary. Back at the end of January, when China had the virus and the U.S. did not, that seemed tone-deaf to human suffering. A few months later, with China in recovery mode and the U.S. reporting 2.2 million cases, it’s clear that it was also off-base on where the economic costs would fall.

Beijing took action on Feb. 1, a Saturday. For more than a week, China’s financial markets had been closed, an extended break as policymakers kept the 1.4 billion population on lockdown for the Lunar New Year holiday. On Monday, they opened again. With traders scrambling to price in a plethora of bad news—from a rising case count to falling markets in the U.S. and Europe—there was only one way the markets could go: down.

In a show of strength, the People’s Bank of China, the China Banking and Insurance Regulatory Commission, and the State Administration of Foreign Exchange issued a joint statement, committing to stabilize the market and extend more credit to small businesses stretched to the breaking point by the lockdown. More action followed. The People’s Bank of China injected 1.7 trillion yuan into the economy—a record slug of cash aimed at calming nervous markets. Interest rates were cut. Bearish short sellers faced new regulatory constraints. And cash-rich insurance funds were given a clear signal: Buy stocks now.

It worked. A drop in stocks was inevitable, but with the assurance of strong support from Beijing the market quickly regained lost ground. The yuan, a crucial gauge of investor confidence, moved back to the strong side of 7 to the dollar. China’s seven-day repo rate, the beating heart of the financial system, stayed low and stable, showing banks had no shortage of funds.

With the financial system steady, policy focused on plugging the gaps for businesses and households—preventing the lockdowns necessary to control the pandemic from triggering a downward spiral of bankruptcies and unemployment. Banks were told to go easy on borrowers. Nationwide, small enterprises and companies got a holiday on loan repayments. In Hubei, the epicenter of the outbreak, big ones were off the hook too. Fiscal policy shifted to reduce the burden on business, freeing up cash flow. An accountant at a cinema in the northern metropolis of Tianjin says breaks on taxes and social security contributions helped keep the lights on through the lockdown.

Major corporations, from state-owned dinosaurs to gleaming new tech titans, swung into action. From long experience, state-owned companies know the crisis drill—no letting workers go, no turning off the investment taps, keep money flowing through the system. Tencent Holdings Ltd. and Alibaba Group Holding Ltd., tech giants whose payment and messaging apps are the digital arteries of China’s economy, created add-ons that enabled the government to judge who could leave the house safely. Leveraging its payments network, Alibaba provided cut-price loans to small businesses and street vendors, helping keep them afloat through the lockdown.

The outcome will be far from perfect. China is poised for the lowest growth of the reform era. Bloomberg Economics’ forecast is for GDP to expand 2.1% in 2020, down from 6.1% in 2019 and the lowest since the start of Deng Xiaoping’s reform and opening in 1978. But a system-shaking crisis has been avoided. Markets are stable. Banks are still standing.

Defying Dire Predictions, China Is the Bubble That Never Pops