2023-09-02 02:46:22
China has long been the engine of global growth, but that status is in jeopardy as its economic recovery from the strict lockdowns of the Pandemic has hit major bumps, and the high-growth era appears to be running out of steam by leaps and bounds. In recent weeks, bad news has been piling up for the world’s second-largest economy: its trading status is derailing, foreign investment has plummeted, the biggest property developers have defaulted and gone bankrupt, and the country has entered deflation.
Already at a Politburo meeting in July, Chinese leaders referred to this year’s potential recovery as “torturous.” They were alluding to their current economic woes, which range from slowing GDP growth rates to mass unemployment, deep-rooted inequality, and dangerously low levels of consumption, among others. The frankness of an institution of the communist party was surprising, and even more so coming from such a high body.
Now the whole world is feeling the heat of a possible economic collapse of the country. Although the mood is not very optimistic, experts agree that a speculative bubble like the one at Lehman Brothers in 2008 is unlikely to burst. On the contrary, the risk is that the current crisis will continue, giving way to a long period of stagnation like the one Japan experienced after 1991.
During the three years of the strict “Zero Covid” policy, manufacturing was hampered and supply lines were disrupted, resulting in a sharp reduction in demand, which produced the most significant economic slowdown since the pro-market reforms began in late 1970s.
As a consequence, the world’s second largest economy is now going through enormous difficulties, confidence falters, debt looms, and strategic competition with the United States and its allies jeopardizes its longed-for future of technological advancement and economic growth. To counteract US influence, the Asian giant is currently intensifying its diplomatic commitment and reactivating its investments abroad.
Current stressors point to excess capacity in the manufacturing sector in the face of weak demand, the ongoing correction of the housing bubble, household deleveraging, weak income growth and high youth unemployment, as well as tensions in local public finances. And this is only what we know. After all, China has slowly stopped releasing a lot of economic data, so it’s hard to get a full picture.
One of the major factors slowing down the Chinese economy is the crisis in the real estate sector, whose weight on the national GDP -adding indirect factors- was estimated at around 30%, according to some analysts. This market is showing signs of stagnation, with major companies in the sector, such as property developer Country Garden and shadow banking giant Zhongrong, defaulting.
In addition, Evergrande, a prominent Chinese-based real estate developer whose plight has worsened over the past year, formally filed for bankruptcy in New York on August 18. A key driver of these struggling Chinese colossi is the deflation of the country’s housing bubble, which not only hits big business hard, but also reins in consumer spending. It is estimated that between 70% and 80% of the family wealth of residents is linked to the brick sector, so the fall in values has serious repercussions on the disposition of domestic consumption.
The regime has recently eased borrowing restrictions for homebuyers and announced more aid to struggling developers. But the scandal of unfinished projects is so widespread that buyers are wary, and government half-measures are not enough to keep new homeowners from defaulting on their mortgages, or potential homeowners parting with their cash.
All in all, China on Friday announced reductions in mortgage interest and the down payment necessary to purchase homes as of September 25, in order to promote the “stable and healthy development” of a sector mired in a major crisis for more than two years.
Along with the real estate sector, exports have been the foundation of the Chinese economy. However, the country faces weak global demand in a world still recovering from the structural economic effects of COVID-19, compounded by the inflationary effects of the Russian invasion of Ukraine. China’s factory activity index improved slightly in August, but remained below the 50-point mark that separates a contraction from an expansion, amid a global slowdown and subdued domestic demand.
Weak industrial activity and private investment contributed to another challenge: the unemployment rate for urban youth (16-24 years old) rose to 21.3% in June from 18.1% in February. This is the highest figure since the government began reporting these data in 2018. Given that unemployment among migrant workers was only 4.9% in June, the problem may lie among recent university graduates. Private companies have been slow to regain the confidence to invest and hire, and the global technology slowdown has led to job cuts. During the period of its Zero covid policy, up to 30 million jobs were lost in the service sector, and the rate of rehiring has been gradual.
The biggest long-term economic challenge facing China is the decline in its workforce. Even if productivity growth remains constant, this demographic change would lead to ever-decreasing GDP growth. Some analysts believe that political measures, such as the massive importation of foreign labor, could work, but would probably carry social or political implications. Others, such as attempts to increase the birth rate, push back the retirement age, or boost female labor force participation, do not see much promise.
Local governments, with the exception of Beijing, Shanghai, Guangdong and Fujian provinces, are heavily in debt and struggling to pay civil servant salaries and keep up with interest payments. Local government debt stood at $2.8 trillion in 2022. But the IMF expects the so-called hidden debt attributed to local government financing vehicles (VFGL) to reach $9 trillion this year.
The entire Chinese economy is strategically mapped out through a series of five-year plans that set annual growth targets and stipulate how the economy should grow and which sectors it should prioritize. Because the CCP controls both domestic and foreign companies, it can thus influence investment decisions, resource allocation, and business strategies to help the state achieve its goals.
The fact that the government has been reluctant to announce a massive stimulus package shows its concern about adding to the mountain of debt. The dilemma of those responsible has been aggravated by speculative attacks on the yuan. The Chinese currency has depreciated around 5.5% so far this year, due to the weakening economic outlook. This has tied the People’s Bank of China hand and foot when it comes to cutting interest rates – a modest reduction of 10 basis points, to 3.55%, of its one-year prime rate -, in a At a time when the appropriate policy response would be to drastically reduce borrowing costs.
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