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THE DRASTIC closures insisted upon by Xi Jinping against COVID-19 continue to disrupt China’s dynamic capital structure, which is preventing China from continuing to function as a critical hub in global supply chains. Retail sales in China have fallen just over 20% between March and May 2022, while industrial production fell 3% in April and grew by less than a point in May. Bloomberg already estimates that Chinese GDP growth will be limited to 2% in 2022.
The giant Chinese bubble that would burst in a recession is its inflated real estate market. And Beijing is sending mixed signals by maintaining closures and announcing reductions in private company profits, while the central bank is cutting bank reserve requirements and benchmark mortgage rates. China slows its economy with closures against COVID-19 but increases its high debt ratio, failing to avoid real estate and infrastructure disinvestment.
Factory closures and logistics disruptions are destroying foreign companies’ confidence in China. Investors will point to COVID-19 controls as the biggest problem for doing business in China. The European Chamber of Commerce in China’s survey conducted in May revealed that 78% of companies see China as less attractive for investment because of its COVID-19 restrictions. On the hand, 92% of companies point to the closure of Chinese ports, falling road transport, and spiraling maritime costs.
In the survey, 23% of participants consider moving their investments out of China. And in June, 50% of participants pointed to an increasingly politicized and unstable economic environment as another trust problem. Insisting on cheap credit with more liquidity while dismantling business capacity through virus closures —which the rest of the world is abandoning— may push China into stagflation as the investment mistakes, blunders, and corruption that grew in the bubble come to light.
In Henan and Anhui, there are protests by bank account holders whose funds have been frozen since April 18 in banks affected by the Henan Xincaifu Group Investment Holding scam. The South China Morning Post quotes a depositor with 200,000 frozen yuan (equivalent to about 30,000 dollars) who denounced being under surveillance by the authorities. Four hundred thousand people have had their savings and business funds frozen for months. The total amount is around 40 billion yuan (equivalent to 6 billion dollars.)
The alleged scam by Henan Xincaifu Group Investment Holding to control several rural banks by cross-shareholding, raising capital and shares, and manipulating banks and executives put four banks and their account holders in check when police arrested the alleged scammers, confiscating and freezing the funds and assets involved in the case. The mastermind of the scam, Lu Yi, claimed since 2004 that he held the 30-year franchise rights to the Lanwei Expressway project in Henan and Shandong as collateral for the loans that put the banks on the hook.
Instead of intervening or liquidating the affected banks in response to account holders, Beijing resorted to silence and repression when desperate account holders finally dared to protest for their money. CNN reports that a businessman who fears the bankruptcy of his factory because he will not be able to access his four million yuan deposit (about 596 thousand dollars) for months said that all his life, he had had faith in the party and its leaders, but after what he has experienced now he “will never trust again.”
Something like Henan would be much less than the tip of the iceberg of all that may come to light when the bubble bursts and a recession begins that Beijing will try to manage by repressing many Chinese who, after what I fear, will live in the first recession of the new China, “will never trust again.”
Guillermo Rodríguez is a professor of Political Economy in the extension area of the Faculty of Economic and Administrative Sciences at Universidad Monteávila, in Caracas. A researcher at the Juan de Mariana Center and author of several books // Guillermo es profesor de Economía Política en el área de extensión de la Facultad de Ciencias Económicas y Administrativas de la Universidad Monteávila, en Caracas, investigador en el Centro Juan de Mariana y autor de varios libros