2023-08-27 00:03:06
This is the year of the Water Rabbit in the Chinese calendar, an animal that symbolizes ingenuity and prosperity in the culture of the Asian country. But little of that is bringing 2023 to the Chinese economy, which is experiencing a particularly delicate situation with the bursting of a double bubble. “What we are seeing in China is what we experienced fifteen years ago, the explosion of a double bubble: real estate and debt, with the mitigation that in China most of the debt is internal,” explains Raymond Torres, director of Economic Situation of Funcas.
15 years ago it was 2008. Lehman Brothers had gone bankrupt and previously the US mortgage companies Fannie Mae and Freddie Mac; the ruin of high-risk mortgages (the ‘subprime’) spread like wildfire through the markets and became a tremendous financial, economic and debt crisis. The good news is that the situation is now less serious, mainly because the interconnection with Chinese financial markets is much less than it was with the United States and its complex products.
The obvious thing is that the sneeze of a giant like China can infect the world. And the Asian dragon has much more than a cold. China is not in recession but its economic growth is weakening. And the internal depression will spread when the real estate sector collapses, which represents 24% of final demand if its effect on other sectors is added, according to a study by Caixabank Research.
A quarter of China’s economic activity is tied to its real estate sector, which is now sinking
China is the second largest economy in the world, behind only the United States. In 2022 it contributed a quarter of world growth. To get an idea of the magnitude it represents, last year the Chinese GDP was greater than the sum of the five countries that follow it; Japan, Germany, India, UK and France. So the first impact that worries is the lower global economic growth and, especially, the decrease in international trade.
A weakening of international trade, which in the second quarter already fell by more than 3%, is worrying for Spain now that it had managed to increase its exports to the point of converting the foreign sector into a mainstay of our economy. Last year, the foreign sector contributed almost half of the growth of Spanish GDP, with a contribution of 2.6 percentage points over a GDP increase of 5.5%. It is true that Spain sells little to China (barely 8,000 million in 2022, mainly ham and other meat products, chemical and mineral products); rather, it buys it (49,653 million last year, especially office equipment, capital goods, textiles and clothing), which means that we have a permanent trade deficit with the Asian country.
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Ramón Gascón, coordinator of the Asia-Pacific group of the Exporters Club, believes that exports from Spain to China will not be affected by lower demand. In turn, Spanish companies that import from the Asian country may see their margins and profits increase because China will lower prices to export more. China was the main supplier of goods for Spain last year, with 11% of the total.
What China is going to try is to replace the weakened contribution of domestic demand with exports. “They are trying to compensate for the sluggishness and recession in consumption and internal investment with more external demand, which is going to generate an exacerbated competitive environment,” says Raymond Torres. It’s going to be difficult to compete in the important markets for China like Southeast Asia and of course our own European markets. Chinese electric vehicle exports to Europe are a good example.
But there is also a positive element. Faced with such an uncertain and turbulent environment, the trend that already began as a result of the pandemic to shorten value chains is accentuated. Countries like Germany, where the industry took production to China to lower costs, is now being reorganized in closer centers. And there Spain has a trick to play, explains the director of the Economic Situation of Funcas, if it maintains a favorable competitive position with lower costs than neighboring countries.
The Chinese shocks will increase geopolitical uncertainty, which is more complex for companies to manage. China will try to accelerate the logic of blocks by extending its area of influence and with an increased effort to achieve technological and industrial leadership. A complicated geopolitical environment with which we will have to live in the coming years and which weakens the commitment of Spain and the European Union to the multilateral system.
Will we see a Chinese Lehman?
The bursting of housing bubbles never comes alone and although structural consequences cannot be avoided, such as lower growth and deflationary pressures, “the Chinese authorities should focus on limiting the possible contagion effects in the financial sector and, therefore, in systemic risk. The longer they wait, the bigger the problem will be,” says Alicia García Herrero, Natixis chief economist for Asia-Pacific and a senior researcher at Bruegel. Reassurance is provided by the fact that China is an external creditor. This means that the real estate sector did not expand by borrowing from abroad, but was financed by domestic savings. In this sense, the risk of a balance of payments crisis in China is very low, acknowledges García Herrero.
“The Chinese authorities should focus on limiting potential contagion effects in the financial sector and thus systemic risk. The longer they wait, the bigger the problem will be.”
Alice Garcia Herrero
Chief Economist for Asia-Pacific at Natixis
Santiago Carbó, professor of Economics at the University of Valencia, also stresses that Europe’s direct financial exposure to China is small so that the current crisis can generate turbulence for us. The impact right now will be very limited, he says, and proof of this is that the stock markets are not taking it very badly.
China has sufficient means to control the impact of the bursting of the housing bubble and controls the banks, which are already intervening in the exchange market to prevent a depreciation of the renminbi. The problem is that he does not dare to make a stimulus plan as he did in 2016 or 2018 because the public debt is already very large. There is no short-term solution to this.
There will be no crisis but the economy will not rebound. The financial sector is going to support the Government: if they ask it to buy a house it will buy it, if they ask it to intervene in the exchange market it will; With this, the solution is delayed, the problem grows but the probability of the direct impact of the crisis is reduced, explains García-Herreros. Ramón Gascón, coordinator of the Asia-Pacific group of the Exporters Club, agrees that it is an internal bubble and that the Chinese government will probably force Chinese banks to take significant haircuts to resolve it, although they will have less room to maneuver to lend.
It is always difficult to make forecasts about a country as opaque as China. But the question is in the air: Will there be another Lehman Brothers? «I don’t think it will drag the world because they are going to cover it. Obviously the impact is negative but it will not be a Lehman. But the fact that they cover it only aggravates the problem”, concludes García Herrero.
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