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Chinese economy stutters, with massive geopolitical implications for SA


Natale Labia writes on the economy and finance. Partner and chief economist of a global investment firm, he writes in his personal capacity. MBA from Università Bocconi. Supports Juventus.

This was meant to be the year of the great Chinese rebound. Unshackled by the world’s most draconian Covid restrictions, economists expected the Chinese economic tiger to roar back to life in 2023. Instead, it has looked decidedly meek.

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.

Property sector

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. 

Youth unemployment

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.

Consumer spending

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.

Unsustainable debt

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


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  • Glyn Morgan says:

    China is doing just what Japan did 20 years ago. Now they have a “one child” generation with unemployment at 20% or so and huge debt! How can they pay that off?

    My advice? Buy non-Chinese goods.

    • Johan Buys says:


      If China did not halt its population growth, its youth unemployment would be our 55% instead of 20% and they would not have quadrupled their GDP per capita while ours flatlined.

      For some obscure reason south africans have the inalienable right to produce as many children as they want, into abject poverty. Imagine SA since 1994 with our communist comrade cousin’s birthrate per female. Easier math on a Friday afternoon : imagine SA today with 18m fewer south africans…

    • Roelf Pretorius says:

      No China used to be doing that from the 1980’s to less than 10 years ago. But Xi has asserted political control again, and is in the process stifling the economic development that is driven by the existence of free enterprise. Xi, with his renewed political control, is stifling that. Eventually, if China wants to keep growing its’ economy like it used to be the last 40 years, it will have to democratize; if it is not prepared to, that economic progress is not going to last.

  • Mark K says:

    I came back from China in late 2022 after 12 years there, doing corporate training, mostly. The points raised in this article are all valid concerns, but the facts on the ground are significantly more serious than the official statistics would indicate.

    Zero Covid for nearly 3 years utterly crushed small businesses. People like my Chinese in-laws are okay. They work in the government system. They’re still buying Mercs and BMWs (but are a lot more cautious about property). Xi is directing huge resources to SOEs and government agencies. Even so, one of my in-laws had his salary cut in half with no warning this year.

    For small business owners, recent graduates, and migrant workers though, it’s been an economic apocalypse. I always doubted that China would surpass the US because their education system, Great Firewall, and IP system disincentivises creativity and I’ve been warning about the colossal bubble in the property market for more than a decade (and was ignored by in-laws and students alike).

    I don’t see any chance of it now, and that’s not counting US and European de-risking of supply chains.

    • Stuart Hulley-Miller says:

      Well put and agree 100%.

    • Steve Davidson says:

      Thanks so much for your report, especially as you obviously have practical knowledge. I actually feel sorry for the Chinese as they’ve never really had a chance. Things looked good under Teng Hsiao-p’ing for them, but this idiotic New Mao, Xi, has reversed everything. Like Japan with its Bushido type management, I can’t see them getting anywhere. I mean, what have the Japs or the Chinese discovered in the modern Era?

      • Johan Buys says:

        Steve : with respect, you do not understand the power of Japan measured across its manufacturing, its patents, its net foreign assets, its education system. Don’t use the Nikkei as a yardstick of performance when in reality Japan is one of the biggest owners of all the other yardsticks.

        China and Japan have net foreign reserves that exceed the sum of the next DOZEN on the list. Both have declining populations of better educated than most others and increasing GDP per capita. Their pension fund is the rest of the world. If countries were listed companies, I would not short China or Japan.

      • William Stucke says:

        Oh boy, Steve! Back in the day, Texas Instruments was the biggest chip manufacturer in the world. Until the Japanese started eating their lunch. So, they sent people to go and see what they were doing right. TI came back and implemented what they had learnt. A small improvement, but they had a long way to go. So, TI imported some Japanese managers. Again, better but not good enough.

        In the end, TI built a factory in Japan, managed and staffed by Japanese. And the biggest and best large integrated circuits (“Chips”) are all made in the East, and most of them designed there. The two most important countries in chip manufacture today are Taiwan and South Korea. Japan still produces a lot of the chemicals needed.

        According to The Economist, Taiwan produces over 60% of the world’s semiconductors and over 90% of the most advanced ones. [Elsewhere I see a figure of 20%, not 60%] Most are manufactured by a single company, Taiwan Semiconductor Manufacturing Corporation (TSMC). [UMC, also in Taiwan, is a contract chip manufacturer, like TSMC.] Until now, the most advanced have been made only in Taiwan. While Intel remains the largest chip manufacturer by production volume (according to US sources), their technology is years behind TSMC.

        The semiconductor industry is called Taiwan’s “silicon shield”, giving the world a big reason to defend the island.

        And the machinery to make the most advanced chips? Made in the Netherlands!

    • Scott Gordon says:

      Glad to hear your in-laws are ok .
      Wonder what made you come back to SA , with all our issues 🙂
      While not having your on the ground insight , the whole system is unviable .
      The burst of the property bubble ( Ponzi) scheme is of epic proportions .Not just for Evergrande and the Garden group , all the downstream industries are affected .
      Imagine getting a mortgage for a place that is not built and still be on the hook for the loan .
      As for the future , it looks bleak for most of the Chinese .
      And they are not happy .
      Public protests ended in the Square , until recently !
      The flu put an end to that .
      Now seeing crowds calling for Xi and the CCP to step down , demanding their money from frozen bank accounts , even ‘ banner man ‘ and the white paper movement .
      China’s growth was from domestic consumption and foreign investment , 3 years of lockdown killed local demand /production . Tech companies have been leaving for over 10 years . Now Foxconn and Apple are leaving , with many 1000 s out of work .
      Even their statistics show the country is drowning in debt .
      From the local banks not lending , to the cities and provinces having financed unsustainable projects .
      The 2 major construction companies have $350 b in debt to be paid in July / August , how will that go ?

      • Mark K says:

        What made me come back to SA?

        (1) The increasing difficulty of bypassing the Great Firewall.

        (2) I’ve been working remotely for several years now. Much cleaner air in Cape Town and much more strictly enforced food safety standards. Cost of living used to be much lower in China but not so much now. Working remotely, I asked why I bothered staying.

        (3) Rising hyper-nationalism in China (fed by a torrent of propaganda) leading to an aggressive xenophobia that left me feeling unsafe. I was threatened (and screamed at) several times over 2021 and 2022. On one occasion, an old woman screamed at a supermarket attendant for letting a dirty, diseased foreigner (me) into the supermarket, despite my having a green code on the C19 tracking app and a normal temperature reading. This sort of thing never happened to me before – I was previously warmly welcomed.

        (4) Sheer fatigue at the constant lockdowns, restrictions, and compulsory C19 testing.

    • Natale Labia says:

      Thank you Mark, really appreciate your insights! Super interesting.

      • Mark K says:

        My pleasure. I’m happy to provide such going forward too. It’s been a really interesting decade and a bit.

        • Gabi Neukom says:

          Thank you for your first hand inputs. It is so difficult these days to know what is the real situation for the population in various countries in particular China. Most appreciated insight.

    • William Stucke says:

      I suggest that you write a couple of articles for DM on the subject of China, Mark. It looks like you have the experience and the skills.

  • Bryan Aitken says:

    China had a one-child-policy for 36 years… the gap in the tax base must surely have a detrimental effect on the economy at some point in the future.

  • Ivan van Heerden says:

    Everybody knows what happens when powerful countries start to collapse, they usually go to war.


    Stuttering or changing gear? Official growth forecast for GDP in 2023 is around 5%; this week’s Economist forecasts 5.5%. The IMF World Economic review published in May forecast that China will provide 35% of this year’s global GDP growth. India will provide 15% ahead of 14% for ALL of the Americas and 7% for Europe. I think – like Mark Twain said of his reported death – that China’s death has been greatly exaggerated. What many economists have missed is that China’s growth spurt – like the US from 1865-1914 – has been driven primarily by rural urban migration (for the US, it was immigration from abroad.) The intensity of this migration has lessened from 30m to 20m per annum. At this rate China has about a decade to go before ots demographic negatives really kick in.

    I do not think South Africa HAS hitched its wagon simply to China. For capital, it is still hitched overwhelmingly to the Western wagon. For an interesting way of being friends to all, see my article on Kenya elsewhere in DM.

  • William Stucke says:

    Very strange that the Communist Party controls China, but it’s very much a capitalist society. A collapsing bond market is the epitome of badly run capitalist societies.

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