Monday, September 20, 2021

China News: How Country’s Tech Crackdown Is Jeopardizing Chinese Economy

Highlights

  • From education to property, China’s tech crackdown has started to show unfavorable impacts on the country’s economy.
  • The $100 billion edutech industry was majorly hit by ‘no-profit’ rule.
  • Steel and coal output has significantly plummeted too.
  • Half a trillion dollars wiped from Chinese stock markets in just a week.

China News, Beijing: In recent months, Chinese regulators have implemented a strict crackdown on private companies in a range of industries– from steel to education to property. This crackdown, sometimes implemented on antitrust grounds or over anti-competition concerns or data security or simply to prevent companies from making excessive profits, has left the financial markets roiled and investors all over the world, weary of putting in money into the Chinese economy.

Despite this, the promise of President Xi Jinping that China will strive to complete major economic and social development targets set for this year appeared an overstatement given the setbacks that the nation is suffering due to reckless crackdown. It has been further been amplified due to the signals sent to the industries and markets by Beijing that more regulations for businesses are to come in the short–term.

Economists are already warning that Chinese authorities need to be careful with the intensity of new regulations as the economy is weakening faster than expected. This, along with the COVID-19 outbreak, can have a long-lasting unfavorable impact on the Chinese economy.

Analysts have further predicted that the crackdowns might turn into the recipe of disaster for Xi Jinping’s pledge of achieving the major economic and social development targets set for this year might.

Even though it is quantitatively very difficult to estimate the direct impact of the strict regulation imposition on businesses in China, this article presents a snapshot of how the crackdown is affecting some parts of the economy already.

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Thousands of Jobs Lost in the Education Technology Sector Alone

The news from China made global headlines as a set of sweeping new regulations were imposed by regulators on the education technology sector of the country worth $100 billion. The crackdown banned profit-making for companies that teach the school curriculum online as well as preventing them from raising capital or going public.

These regulations were ostensibly linked to the underlying social aim of Beijing to reduce social inequality and reducing the financial burden of education on parents so that families are encouraged to have more babies. In the short term, however, this move has led to bleeding in the sector and turmoil in the capital and labor markets (1).

Many companies in this sector are trying to offer courses that are not included in the core curriculum while thousands have shut down. That has led to thousands employed in this sector losing their jobs. 

While there are arguments that those losing jobs in this sector will be absorbed in other growing sectors as well as in the public schools, the move is sure to hit the income of millions in the sector at least in the short term. Further, investors in this sector stand to lose their hard-earned money.  

Steel and Allied Industries Affected by China’s Decarbonisation Push

Considering that China is yet to reach its peak for greenhouse gas emissions, its target of becoming carbon-neutral by 2060 is not only ambitious but also potentially tumultuous for industries still heavily reliant on fossil fuels. To achieve the target, Beijing is pushing for greater use of renewable energy and technology development for capturing emissions.

One of the major victims of this policy is the huge steel industry of the country which has been asked to reduce output even as the sector accounts for a little more than 15% of national emissions(2).

It has been reported in the news that China’s Communist Party’s Politburo had warned against any drastic measures to achieve the emission targets.

The measures and directives of the government have already resulted in a plunge in steel production in the country to a 15-month low in July. There has also consequently been a fall in demand and production of coal.

According to economists, the growth of China’s economy could be curbed by this furious pace of carbon reduction in the scenario of demand exceeding supply. Economic operations in this sector are being hit in many provinces in China because of their rigidity to cut down carbon emissions, leaving no scope for flexibility. It is evident that the long-term goal of carbon emission reduction is being given precedence over the short-term goal of economic growth.

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Property Curbs Hit Home Sale and Allied Industries

Chinese regulators have also come down hard on the runaway property market of the country and implemented restrictions such as raising mortgage rates, temporarily halt in land auctions in some major cities, and preventing private equity funds from raising public money for investing in residential development projects.

The Politburo meeting in July however stressed: “houses are built for living in, not for speculation”, which supported the move of the government to clamp down on this sector.  Home sales have been already hit by the restrictions with a decline in first-tier cities of China for two straight months, according to data from China Real Estate Information(1).

According to Nomura Holdings, more than half of the slowdown in GDP growth of China in the second half of the year is because of property crackdowns and regulations.

The allied industries including construction materials, furniture, and home appliances, and financial services for mortgages, are expected to have been already impacted by the curbs.

Half a Trillion Dollars Wiped from China Markets in a Week

Just last week, the news of the fall in Hong Kong and mainland China stock exchanges saw more than $560 billion in market value being wiped off the exchanges within just a week. Investors bushed funds out of once highly-favored stocks as they were predicted to be on the regulatory radar too. This was attributed to the continued crackdowns by Chinese regulators on domestic tech and other companies which hit investors’ confidence(3).

There was a 1.8 percent drop in the Hang Seng while there was a 5.8 percent fall in its weekly number which was the largest since the height of the pandemic panic in financial markets in March 2020.

Conclusion

China’s economy was the only major economy that managed growth in 2020 – a pandemic ravaged year when the rest of the economies contracted with some being pushed into a technical recession.

And even as the Chinese economy was already showing signs of a slowdown in 2021, especially in the retail and auto sector, the stiff crackdown on a range of industries by Chinese authorities to meet social targets, has further hit the economy. In addition to denting investor confidence in the continuation of government policies and upending financial markets, these measures have also dampened the growth forecast of China’s economy.

Debdutta Ghosh
Debdutta Ghosh is a Journalist who has been associated with leading media firms of India like Asian Age, Indian Express and Hindustan Times as well as television channels such as Zee News/Business and ABP News as a reporter for more than 20 years. With a Post-Graduation Diploma in Mass Communication & a Bachelor Degree in Science, his expertise as content expert lies in the areas of Business News Analysis, PR, and Marketing Communication.

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