China’s economy falters as Xi tightens his grip

Over the past few decades, China’s economy has experienced skyrocketing growth, fueled largely by huge export volumes, massive debt and an overreliance on the real estate sector. Today, the manufacturing industry is suffering from continued coronavirus shutdowns, energy shortages and supply chain disruptions. The debt bubble seems on the verge of bursting, and the real estate sector will be its first victim, with repercussions that will eventually be felt throughout China and the rest of the world.

China’s overall manufacturing output has declined. The manufacturing Purchasing Managers’ Index (PMI), a measure of a country’s manufacturing activity, fell to 49.2, the lowest number since the pandemic began in February 2020. A PMI below 5 means that the manufacturing sector has stopped growing. Domestic demand remains weak. Imports are slowing down. Debt is high and overall economic indicators are approaching levels not seen since the 1990s.

China’s annual GDP growth could slow to the 3% to 5% range, rather than the 6%-plus range it is used to. Moreover, Xi Jinping’s zero-tolerance policy against Covid is so destructive to the general economy that some experts believe that if the measures are maintained, GDP growth next year could drop to 4%.

The PRC’s total public debt has soared to 263% of GDP. Real estate sector debt is estimated to be at least US$5 trillion. But that figure doesn’t include trillions of dollars in off-balance sheet loans, debts that don’t show up on balance sheets.

Most major Chinese banks are state-owned and routinely engage in murky practices of lending money so that it does not appear on local government balance sheets. Local Government Funding Vehicles (LGVF) are companies created for the sole purpose of borrowing money, used to finance the purchase of land. Local authorities derive 40% of their income from the sale of land. Technically, the borrower is a company, an LGFV, but in reality the local government is responsible for these loans.

As regulators crack down, they find that the real total indebtedness of local governments is considerably higher than previously thought. No one knows the actual total amount of LGFV debt, but some estimates put it at $7.8 trillion, or half of China’s GDP. Meanwhile, the entire real estate sector is in decline and local government revenues are shrinking.

The $5 trillion in debt in the housing market is spread across a number of industries, affecting everyone from investors and home buyers to companies that sell or transport cement and steel. Widespread defaults could rattle the entire economy, causing Chinese stocks to fall, unemployment to rise and deflation. This would result in a sharp drop in purchases of imported goods and raw materials, which has implications for the whole world. Developing countries, in particular, depend on the export of raw materials to China, used in construction and manufacturing. If these two sectors fell into crisis, some of the world’s poorest countries could sink deeper into poverty.

To ease a new debt crisis, especially in the real estate sector, the Chinese Communist Party is cracking down on bank lending processes and tightening credit surveillance. This may or may not be a good long-term strategy to avoid a similar issue in the future. However, this means that credit will tighten in the short to medium term, which will lead to an economic slump. Real estate accounts for about 24% of the economy, while in the United States and other developed countries, real estate only accounts for 15%. The real estate sector not being able to obtain financing will lead to a general economic slowdown and unemployment. It will also lead to a huge loss of savings for families.

Xi urged the public not to speculate in the real estate market as it drives up house prices. He also said he wants to make housing affordable for citizens, thereby intentionally causing price deflation in the real estate market. And while that may favor new buyers, it means everyone bought their home when it was expensive and is now paying off debt on an asset that has depreciated in value.

For US households, real estate represents about 25-40% of net worth. But in China, it’s around 74%. Worse still, houses are so expensive in China that this wealth is multi-generational. With a one-child policy, a young Chinese can be the only child and grandchild of a total of six adults, all of whom would contribute to buying a first home.

In Shanghai, China’s largest, most developed and fashionable city, the average salary is just over US$1,000 per month. With a 1,000 square foot apartment selling for US$725,000, it’s no wonder most young people can’t afford to buy a home without help from their families.

Additionally, due to increased lending restrictions at banks, it may be difficult for a new buyer to obtain credit to purchase a home. Already, new housing starts and housing projects are down 33% year-over-year, with a 10% decline forecast for next year.

Despite so many domestic problems, Beijing’s exports and trade surplus continue to grow. As countries begin to open up and global demand increases steadily, China’s exports will cushion its economic decline, but exports may not be enough to halt it completely. Exports are expected to grow by 24% this year, but exports only make up 20% of the economy, which is not enough to offset the weakening domestic economy, and certainly not enough to mitigate the potential havoc. of a collapse of the real estate and financial sector. could cause.

US Treasury Secretary Janet Yellen said a crisis in China’s real estate sector could put a strain on China’s entire economy, spilling over into the United States. It is one of the first times that US officials have included an economic threat from China among their top policy-making factors.

The negative impacts of a collapse in China would be far-reaching, affecting everything from bank balance sheets, the availability of capital and consumer purchases to employment, as well as citizens’ lifetime savings, which could evaporate from day one. on the next day.

The possible impact on the developing world is that countries dependent on the export of raw materials to China will see their economies shrink, causing unemployment and hardship. The impact on the US will most likely be limited to Americans and US entities heavily invested in China. That said, there are trillions of US dollars, in pension funds and investment funds, invested in Chinese companies traded on US exchanges. While a collapse in China is unlikely to affect the U.S. economy as a whole, many individuals and businesses in the United States could suffer.

Authors biography :

Antonio Graceffo holds a Ph.D. and also holds an MBA for China from Shanghai Jiaotong University. He works as an economics professor and Chinese economic analyst, writing for various international media. Some of his books include: The Wrestler’s Thesis, Warrior Odyssey, Beyond the Belt and Road: China’s Global Economic Expansion and A Short Course on Chinese Economy.

For Intello magazine

Image sources:

–See-ming Lee (flickr, Creative Commons)

–Trey Ratcliff (FlickrCreative Commons)

–The Kremlin (WikimediaCreative Commons)

–Mike Coghlan (FlickrCreative Commons)

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