The Chinese crisis could be worse than the financial crisis
On Monday, Klarna received new financing, which meant an 82 percent downgrade of the Swedish tech giant and bank challenger. On the same day, Kinnevik reported write-downs of the portfolio companies by an average of 30 percent in the second quarter. Signals of a lack of liquidity come from the corporate bond market.Published: 12 July 2022, 19:30Companies often testify to how the chaos in the value chains leads to self-generating tactical games, from hoarding components to companies waiting for deliveries, as they suspect that the shipping companies are deliberately spilling over, to make even more money from the shipping chaos. In the real estate industry, there are likely to be deals to keep market values up, risky if these are not supported by rental income. At the same time, on the stock market, a nervous speculation as to whether the bottom has been reached or not, whether it is time to buy so as not to miss anything or risk joining the continued race. Half-yearly reports on the way in are not expected to provide clarity as disruptions in deliveries still obscure the view, see Di’s major review in this edition. Mess, uncertainty and anxiety, as usual when there is a crisis, refined investors say, implied that it will work out. The problem is that there are no common crises, everyone is different and specific, that is why they occur. And that is why it is so desperately difficult to say how it goes. In fact, the word crisis comes from medicine, where it denotes a condition that can lead to death, that is, when no one can say for sure if the patient survives or dies. But a couple of things can be sorted out. Most importantly, this is a global, political crisis with major consequences for the Western world’s continued policy, both fiscal and monetary policy. It distinguishes this crisis from several others. The crisis in 2008 was also global, but it concerned funding, following US over-speculation in housing. It could be lifted by restoring confidence in the financial system, first the US, then the EU, which cost a lot but worked, at least until now. This time it is instead about trust in realia, ie actual transactions of goods and services. At the center and with enormous dominance is China. It was China that, by virtue of its giant population and firm management, accelerated what we call globalization, that is, the productivity-enhancing specialization that for 30 years enriched the whole world and most of all the poorest. It is China that has always been responsible for the volumes and thus the consequences, ie both low inflation and extremely low interest rates. And ultimately, it is the attendant problem in China that is now causing it for the rest of the world. The pandemic took off in China, wreaked havoc on the value chains and depressed the world economy. And it was Covid who made central banks and politicians, in a panic, pour more money over their citizens, and thus open up to inflation. Perhaps the pandemic even contributed to the war in Ukraine through the exceptional atmosphere that arose, a sense of doom and special circumstances, explosive for autocrats. Economies do not die, and in the end this crisis will also pass, at best rather than we think. But it is clear that the Western world, after 30 years, needs a new recipe. China is no longer to be reckoned with, not at all in the same way as hitherto. This is not only due to the intensification of repression, which is affecting confidence in the country and thus creativity and the economy, but also because the population is starting to decline, probably already this year. No one still knows what the new recipe will look like, which contributes to the uncertainty. Politicians engage in acute pain relief, such as broad energy support, even though they are inflationary. The central bank governors are anxiously trying to raise interest rates and withdraw liquidity. No one knows for sure if they take too much or too little. The solution probably lies with the companies themselves. Admittedly, they are also tangled, with price increases, logistics and debts. But globalization and specialization have done wonders for their knowledge and flexibility. They take these skills with them to the next stage when they regionalize and automate production. Even if it is not cheap venture capital and depressed costs, there can be better times without China being at the center.