China is the world’s factory and also the origin of the proverb, which together with the research of the mathematician and meteorologist Eduard Lorenz, created one of the best-known chaos theories: the butterfly effect, according to which the flapping of an insect in Hong Kong can unleash a storm in New York.
A virus discovered at the end of 2019 in Wuham caused the shutdown of global activity three months later. The blackouts of the Chinese factories or the real estate crisis of Evergrande threaten to cause aftershocks all over the planet. The world is aware of the events in the Asian country while accelerating plans to launch a deglobalization process, which will take several years.
Right now there are four destabilizing factors, the butterfly effects of the Chinese economy, which can cause immediate contagion in the West. The first has to do with the pandemic. The Chinese economy was the first to close and also to leave behind the effect of the coronary, with growth rates for this year above 6%. But consumer spending, which alone represents 38% of the Asian country’s GDP, is the only element that has not yet started.
Retail sales in August returned a ridiculous rate of 2.5%, less than half of the forecast. Behind it is the fear of the population that, at any moment, there will be total closures of entire cities in application of the official strategy of “zero infection”. To this is added the drop in income suffered during the pandemic (In China, no tax plans have been put in place to support citizens like those applied in Europe or the United States), as well as the growth of inequality.
China’s theory of Evergrande is that “no firm is too big to fail”
Several investment banks lowered their expectations for this year and next. In 2016, Chinese growth below the 6% red line dragged the world economy down.
The second butterfly is the regulatory risk or legal uncertainty. In the last quarter, the reform of the antitrust laws of the technology companies caused a stock market storm, whose effects reverberated in the rest of the markets. Although the offensive began in November of last year, when the authorities suspended the IPO of Ant Group, owned by tycoon Jack Ma, valued at 35,000 million dollars, due to regulatory changes in fintech companies. This was followed by antitrust investigations opened to online giant Alibaba, as well as food distribution leader Meituan, at the same time rules to increase government control over school video games, IPOs abroad or data security.
In addition, the Bank of China forced all financial services platforms to toughen their requirements and prohibited equity crossovers between banks and insurers. Measures that sow mistrust about the direction of the Beijing regime.
Some sources attribute it to a persecution of the billionaires after the words pronounced in the Central Committee for Economic Affairs, held on August 17, by the president Xi Jing Ping, in which he called for “common prosperity as the essential pillar of socialism”. Others see a move away from capitalism and a return to a centralized system, which will hit investments in the future, before the XXX Congress of the Communist Party at the end of the year, in which the president must renew his term for the third time.
A third of Chinese industry may stop until the end of the year due to blackouts
The third worrying factor comes from Evergrande, which supports a debt of 300,000 million, which was followed by the defaults of other small promoters such as Fortunia or Sinic. Experts predict that more than half of real estate companies will fail to meet their sales forecasts this year and a third will default. The boom in house prices, which are between 20 or 30 times the average salary, makes them unaffordable and more in the current circumstances.
Despite concerns about the domino effect it may cause, the prevailing theory in the Chinese government is that no one is “too big to fail.”
Local governments began to take measures in mid-2020 to prevent prices from rising further and to compensate buyers who were left with nothing, thus avoiding a social unrest.
But the uncertainty is increasing and the official action led to a fall in the prices of flats, which devalues assets and aggravates the crisis in the sector, as well as a tightening of credit conditions to finance families and the societies.
China is already a heavily indebted country, with a percentage of GDP, including private debts, that is around 280%. The problem is compounded, if we take into account the billions of dollars hoarded in debt by local governments, which until now remained hidden, because they continue to pay interest religiously. If Evergrande falls, it will burst the debt bubble and could drag several banks and the entire financial system with it.
The fourth factor and, without any doubt, the most worrying is the power outage suffered by companies and consumers since 2016. Blackouts are now more frequent as a result of the decarbonisation plan, which requires a 3% annual reduction of GDP in national energy consumption.
Many local governments are far from meeting these targets, which will force further energy cuts. But the problem is that electricity distribution is in the hands of a duopoly (State Grip Corporation and Southern Power Grid) that kept prices fixed for their suppliers and customers despite the fact that coal soared, causing many power plants to stop.
To add insult to injury the flood season in the north of the country paralyzed dozens of coal mines. The government was forced last week to remove the caps on coal prices, at the same time that it reactivated mining operations. Even so, the forecast of some business banks is that up to 30% of the industry could suffer blackouts this winter, also in an uncontrolled manner, which would cause cuts in the supply chain, as well as an increase in the cost of products to the West.
The butterfly effect has already arrived in Spain, where there are large companies such as Sidenor, Fertiberia, Arcelor Mittal or Asturiana de Zinc that were forced to cut their production and several more will be added in the coming months, among them the car factories, already half inactive due to the lack of chips.
This week, alarms went off in the United States after learning that prices were stretching to 5.4% at the same time that job creation and therefore the pace of recovery slowed. The specter of deflation flew over the New York parquet. If the two engines of the world economy, China and the US, catch up, the rest will follow. But it is still too early to announce catastrophes. Winter is likely to make supply problems worse. The world’s factory suffers blackouts and their consequences will be felt at the other end of the planet in a short time due to the butterfly effect.
PS.- In Spain we are not much better than in China. The most remarkable thing is the tumble that the European Union gave this week to the proposals of the vice president, Teresa Ribera, to lower the price of electricity. He first forced her to seek an understanding with the power companies and then rejected all of her requests, including changes to the auction to set the electricity rate.
Ribera validated the Royal Decree in Congress to comply with Podemos, but later offered to modify it in exchange for the power companies signing five-year contracts with the industry. Closures like Alcoa’s could have been avoided if the government had guaranteed a stable rate.
Ribera gave the electrics a pulse and lost it. The problem is not in the “extraordinary profits” of the electricity companies, as Sánchez said in a burst of populism, but in the rising cost of gas and Ribera has in his hand to modify the calculation for setting wholesale prices.
The pity is that they do not succeed more than when they rectify. The next blur of the Government is in the Budgets, which include an unrealistic forecast of 7 percent growth for 2022 and do not even contemplate an increase in energy prices. The text presented by the head of the Treasury, María Jesús Montero, foresees that the cost of a barrel of oil will fall from the current close to 80 dollars to an average of 60. Illusion is also alive!
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