As China’s economy reels under COVID-19 and the housing market plummets, President Xi Jinping looks poised to become the permanent leader
Talk about the moment. By this time next week, Chinese President Xi Jinping will be on course for a stunning personal victory.
After a decade of leading the world’s second-largest economy, increasing China’s global influence and positioning the country as a military superpower, Xi will cement his own destiny next week by securing a historic third term as Party General Secretary. communist and military leader.
For all intents and purposes, he will become the permanent ruler of China.
It was a close call. The skillful political footwork needed to abandon a four-decade rule that limited power to two terms has gradually crumbled. The country’s economy is reeling under funding shortfalls and mounting debts, a chaotic response to COVID-19 and a residential real estate sector threatening to implode.
When it comes to our future and that of our region, nothing matters more than China.
Once the economic miracle whose growth helped propel Australia through the global financial crisis, China now faces serious economic problems.
Just as Japan entered a decades-long stagnation in the 1990s, China’s growth, fueled by huge government spending, is stalling as it enters what is known as the “doom trap”. middle income”.
That would be worrying enough, given that it is our largest trading partner within a mile of the country. But add Xi’s determination to establish himself as supreme leader and his strategy of building domestic support with an aggressive military posture overseas and the situation becomes extremely worrying.
Go back in time
In 1982, Deng Xiaoping imposed the two-term rule in an attempt to avoid a repeat of the social and economic disaster presided over by Mao Zedong forever.
It was a policy that paved the way for China’s industrialization, growing sophistication and rise to the club of economic superpowers after decades of starvation and oppression under a brutal dictatorship.
If Xi’s rule so far is notable for anything, it’s because he’s focused on his own position rather than addressing the myriad of deep-rooted macroeconomic issues threatening to undermine the country’s future. .
Cementing his own power base, whatever the cost, has become the hallmark of his leadership. Political rivals who were quickly eliminated as part of the corruption crackdown, Xi has recently turned his attention to the country’s local billionaires.
Jack Ma, the founder of Alibaba, was perhaps the most publicized victim of the purge. But it extended to the hierarchy behind many of China’s most successful tech companies, including Tencent and Didi. In no time, the authorities had set their sights on companies in the education sector, much to the dismay of Western investors.
Soon after, at least 73 companies announced they would contribute to Xi’s “common prosperity fund”, a term that dates back to the days of Mao.
What’s wrong with the Chinese economy?
Where to start?
In the short term, Xi’s insistence on eliminating COVID-19 has been a disaster. Huge parts of the country’s manufacturing base and its distribution networks have been shut down for long periods at enormous cost, leaving China the only country to maintain strict lockdowns.
There’s a reason for that. Its rollout of vaccines, especially for the elderly, has been haphazard and slow. Additionally, its local vaccines have been nearly useless against newer COVID variants and its hospital system is inadequate.
This has played havoc with slowing growth, which could reverse, which will weigh on a global economy that is collapsing under the weight of interest rate hikes.
But there are more fundamental problems with China’s economic structure.
The first is that household income is terribly low and savings are far too high. This means that household spending – the engine of most developed economies – is not enough. To compensate, economic growth has been boosted by the fact that Beijing has spent huge amounts of borrowed money to invest.
Certainly, the country has an incredible infrastructure with high-speed rail, massive highways and modern cities. But maintaining that momentum means pouring ever more money into ever more marginal projects that don’t bring in as much. Eventually you end up with roads and bridges to nowhere and towns with no people. And a mountain of debt.
In the longer term, China has an even more serious demographic problem.
Its working-age population peaked in 2014, and depending on which study you read, its population will begin to decline as early as next year. According to the Center for Strategic and International Studies, this will reduce its growth rate by 2 to 3% by 2030.
Real estate market in crisis
The rest of the world may be in a frenzy of interest rate hikes. Not China.
In recent months, the People’s Bank of China has cut interest rates in an effort to stimulate growth. It cut rates twice in August and further talks are ongoing.
This has sent the currency, the yuan, into a tailspin in recent months, prompting a scramble from the People’s Bank of China to back it up.
Despite lower interest rates, house prices continue to fall. They have fallen every month for the past year, with sales falling by around 20%, a situation which now threatens to create a revenue problem for the government.
Chinese property developers, meanwhile, are in for a world of pain. Once among the most highly regarded real estate companies in the world, they now rank globally for all the wrong reasons. A series of high-profile defaults, led by China Evergrande, saw investors flee the sector.
Given that property development has been a major source of growth for the Chinese economy, a downturn will have major ramifications for Australia and our economy.
This has our makers in a foam. A fortnight ago, the Reserve Bank of Australia released a Chinese developer outlook report. He didn’t paint a pretty picture.
The chart above, which excludes China’s embattled Evergrande, highlights the contagion that has swept through private property developers over the past two years as investors fled debt-ridden operations that cannot secure government support.
Troubles on the Home Front
The crisis was first triggered by a policy shift in Beijing that attempted to rein in debt within the sector with what was known as the “three red lines” policy. It backfired dramatically as “these regulations made the financial situation of riskier developers even more precarious in the short term as they attempted to deleverage quickly”.
The problems quickly spread. Unable to secure financing, property developers were forced to halt construction or scale back operations, which only exacerbated the problems.
“As a result, the vast majority of major listed property developers and more than half of all listed developers have already defaulted or suffered serious financial difficulties,” the RBA report noted.
Alarmingly, he adds that local councils, which relied on revenue from land sales to developers, are now trying to replace lost revenue by selling to state-owned finance vehicles instead, a sort of deal take turns to mask the problem.
Meanwhile, angry landlords who had paid for flats where construction had stalled refused to pursue mortgage repayments, threatening to destabilize the banking system.
Despite these issues, Xi continued his tough line on developers who said years ago that housing was shelter, not speculation.
His feeling may be right. Ultimately, however, as Western governments have learned during the global financial crisis, taking the moral route (letting Lehman Brothers collapse) can lead to chaos.
In the case of China, this will likely lead to a bailout of the state and a reversal of the grand flirtation with capitalism.
Xi’s reign may look more like Mao’s.