Data released last week showed China’s economy lost further steam in June, as manufacturing activity contracted again and other sectors failed to build momentum.
China’s economy is afflicted by a confluence of five problems.
First, the property sector is crashing. After the government cracked down on over-indebted developers in 2020, house prices across the vast country started falling. In some cities, such as Zhengzhou in the northeast, they have tanked by up to 80%. Many developers have stopped building houses that had been sold but not delivered, prompting home buyers to cease mortgage payments.
According to Bloomberg data, banks advanced the smallest amount of longer-term loans to households last year in almost a decade, and borrowing was down another 13% in the first five months of this year, indicating fewer people are taking out new mortgages.
Worryingly, with very few new buyers coming into the market, this downward spiral could have much further to run.
Second, is youth unemployment. At 20.8%, the jobless rate for those aged 16 to 24 is the highest since China began publishing the data in 2018, and is four times the national urban rate. Key drivers are the slump in services industries as a result of strict Covid rules and the decline in the property market.
Third, this mix of unemployment and crashing property prices has stalled what was meant to be the engine of growth for the next chapter of the Chinese economic miracle: domestic consumer spending. Post Covid, economists were expecting this to boom as consumers splurged years of savings swelled by lockdowns. Instead, faced with an uncertain future, consumers are wary.
Exacerbating the slow pick-up in consumption is softening demand from the massive export markets of the US and Europe. Since peaking at a record $340-billion in December 2021, exports in May were down almost $60-billion and are set to continue dropping as rising interest rates weigh on growth in Western economies.
Fourth, government and regional borrowing has simply become unsustainable. According to Bloomberg data, since 2009 total debt to GDP – which consists of annual corporate debt, household debt and government debt – has swelled 90%, to more than 360%.
Even more concerning is the so-called “hidden debt” from local government financing vehicles, which are companies created by municipalities to borrow on behalf of cities, towns and provinces. This debt does not appear on their balance sheets or those of the government, with much of it having been wasted on vast white elephant infrastructure projects.
Anecdotal evidence abounds about highways to nowhere and completely unused international airports built for flights that will never arrive.
It is this “hidden debt” that has become a major risk for China’s local governments.
The International Monetary Fund estimated in February that, nationwide, there was 66 trillion yuan ($10.6-billion) of this debt at the end of 2022, up from 40 trillion yuan ($5.5-billion) in 2019. Much of it is in the form of bonds owned by retail investors which may never be repaid.
Combined with sharply lower property valuations, this could be a ticking time bomb.
Economic stagnation threat
Finally, unlike in 2009 when China unleashed the world’s largest-yet fiscal stimulus package to kickstart the economy, President Xi Jinping does not have that luxury in 2023. The economy cannot afford more debt.
China must grow from increased productivity and domestic consumer demand. If this does not happen, a Japan-style lost decade of economic stagnation looms.
Richard Koo, chief economist at the Nomura Research Institute, recently warned that China is sinking into a “balance sheet recession”, where families and businesses divert more of their income toward paying down debt rather than consuming or investing. This was a driver of Japan’s descent into deflation after its property bubble burst three decades ago.
Such an economic slowdown in China would have profound geopolitical implications.
It has become something of a commonly accepted myth that this will be the Chinese century. China’s GDP is meant to overtake the US by 2034, becoming the world’s pre-eminent superpower. South Africa has bet the house on this, committing everything to its relationship with the rising Asian colossus and alienating itself from the West in the process.
For many, Chinese emerging dominance has been welcomed, finally vanquishing the “neocolonial US”, as the EFF’s Julius Malema has termed it.
This may never happen. Chinese political stability has depended on one thing – economic growth improving the lives of everyone. It has been a clear bargain.
The Communist Party has demanded a monopoly of political power in return for delivering the fruits of economic progress. Should the latter part of this Faustian pact start to falter, it remains to be seen whether the majority of Chinese will respect the former.
The fate of the 21st century rests on how this stuttering growth project plays out. DM