China: A potential black swan threatens the world

Photo Natalia Motyl
Natalia Motyl

Bachelor of Economics (UBA). Economic Analyst of Libertad y Progreso.

This article was originally published at Infobae on September 26th, 2021

In his book The Black Swan, Nassim Nicholas Taleb develops a theory that describes an unexpected, unpredictable, and disruptive event of great socio-economic impact as a black swan. These events have the following characteristics:

  1. It’s outside normal expectations: An atypical event that couldn’t be predicted.
  2. Has great socio-economical relevance.
  3. It can be rationalized in hindsight: Even though nobody was able to predict it, a predicatable explanation can be found.

Ever since July 18, when China’s Central Commission for Economic and Financial Affairs announced its intention to achieve “common prosperity”, many began to fear that the Chinese government is becoming a new “Black Swan.”

What does common prosperity mean?

It is a proposal by the President of China, Xi Jinping, consisting of large local companies adjusting their profits to “return them to society”, in a very collectivist vision. In itself, it is a turn of the Asian Giant towards socialism. Apparently, China wants to forget that following Mao Zedong’s death Deng Xiaoping famously said “It doesn’t matter whether the cat is white or black, the important thing is that it catches mice ” and carried out important reforms that opened the country and allowed China to grow rapidly.

In “common prosperity”, the Chinese Government refloats an expression used in 1953. The idea is to mark a dengist separation and abandon a process in which “certain regions and groups of people got rich first.” This means, according to Xi Jinping’s Government, that a readjustment in regulations and growth is necessary to reduce inequalities. Obviously, as is we know, all these policies, in the long run, do nothing more than equalize downwards.

The Chinese government’s objective is to stop the expansion of the country’s big technology companies such as Alibaba, Tencent, Ant Group, or DiDi.

After the State Administration for Market Regulation of China declared that Alibaba stifles competition in the country’s online retail market and “infringes on the businesses of merchants on the platforms, as well as the legitimate rights and interests of consumers,” the company decided to contribute to the cause. Remember that, in 2021, Alibaba had to pay the State a fine of US $ 2.8 billion. Thus, it will invest US $ 15.5 billion towards “common prosperity” in the form of 10 initiatives that involve technological innovation, economic development, job creation and support for vulnerable sectors.

Daniel Zhang, CEO of Alibaba, argued that the company has benefited from the strong advance of China’s social and economic progress and that, if society did well, so did Alibaba.

Those kinds of decisions did nothing but harm investors in these sectors. Since November 2020, Alibaba’s value has fallen by half from its all-time high during October 2020.

In addition, according to a report published in the Financial Times, the Chinese authorities intend to dissolve the Alipay division of Ant and force the creation of a separate and independent loan application that could end up being state-owned. This could strike another blow to the tech company, making it fall again.

Obviously, all these decisions could indicate, as many investors fear, that Xi Jinping himself is the Black Swan. The biggest concern is whether Xi Jinping will venture into new regulations, generating a huge chain reaction that would affect several economic sectors in the world.

Another worrying point is that the Black Swan could also come in the form of Evergrande, a real estate company that has a US $ 300,000 million debt and is on the verge of bankruptcy.

Evergrande bet that China would carry out a more expansive monetary policy, like the US and a relaxation in restrictive measures due to the pandemic, that way the real estate market would recover and could face its debt. However, it was the opposite and one of the 500 largest companies in the world is bankrupt, threatening a domino effect that would affect the entire banking system like a new Lehman Brothers. It is still too hasty to venture to conclusions, but the risk remains latent.

As we observed, we cannot yet claim that China is a Black Swan, but the risk is there and more and more investors are becoming concerned.