THE DIRE STATE OF CHINA'S ECONOMY- Ishita Bisht

China has been on the path to overtaking the United States to become the world’s largest economy which was speculated to happen by 2024. Over the years, it has grown from a third-world country to a superpower. Today it has become one of the most significant trade partners and gained immense influence as a byproduct.

However, China is currently facing a number of issues. The issues range from a youth uprising to severe debt issues. 

The article discusses the reasons behind the bad shape of the economy and its looming impact.

The Real Estate Bubble

The Chinese economy and the housing market started growing after the 1979 reforms. This was also fueled by the intense migration of people from rural to urban areas for a better quality of life. Most of these were farmers who were frustrated by stagnant wages and looked for work in factories. In addition to this, owning houses was considered important for financial stability and marriage in China's culture. 

Soon affordable housing became an issue. People started pooling money to purchase houses for relatives as the prices of houses were touching heights due to supply issues. Governments eased credit lending standards which fueled economic growth but this was taken advantage of by companies like Evergrande. 

70% of Chinese wealth is stored in the real estate market. People looked towards owning third and fourth houses as investments. This led to a never-ending demand. To deal with this, developers created a system to expand production further. People were ready to invest in China due to the immense growth opportunities it offered, so foreign debt was relied upon by developers. They also started offering buyers pre-sale options. People would pay off their mortgages well in advance of the project's conclusion. By obtaining pre-sales, they were able to begin new projects while still working on the old ones. When the new projects produced new pre-sales, they divided some of the proceeds between financing the construction and starting new projects, and so on.

Once the influx of people to urban areas started to slow down, it led to a slowdown in presales. The developers had to rely on debt from foreign banks even more. To prevent a looming crisis, the Chinese government then had to interfere by implementing the ‘Three Red Lines’ policy. Each line represented debt ratios that the companies had to comply with. Evergrande-like companies crossed all red lines and soon ran into liquidity troubles. Property developer Kaissa, Shimao Group started defaulting on dollar bonds and loan repayments which led to the loss of confidence in the Chinese housing market. People started refusing to pay back their mortgage loans as they lost trust in the market. The value of these loans is somewhere between 150-300 billion dollars.

As of now, real estate-related activities are close to 30% of the GDP of China which might lead to a ripple effect on banks, local governments and the stability of china.

Debt-related issues

China has been struggling with various unprofitable, debt-ridden infrastructure projects. For example, the super-speed railroad. It was started after the 2008 financial crisis to bring the economy back on track through a fiscal policy boost. It brought steel and concrete industries out of dire situations. It did save the economy from recession. But problems soon rose up. The railway connected mostly secondary destinations which led to demand issues. The project was funded by debts and publicly issues bonds. The interest payments on this project as of today have surpassed the income operating income from it. The total liability of this project is 5 per cent of the Chinese GDP. The zero covid lockdowns further worsened the situation.

In an effort to revive the economy, the Chinese government announced economic stimulus measures and gave China Railway permission to issue bonds for railway development worth an additional 300 billion yuan.

There are a lot of ghost cities in China as a result of excessive debt expansion, financial considerations, and bad planning. These are locations with significant infrastructure and property that largely remain desolate. So much so, that the number of empty apartments in China could house about 90 million people, more than the population of Germany and UK.

External Infrastructure projects

The one belt, one road initiative is becoming of the most unprofitable projects of all time. It was China’s attempt to grow itself as an export-import market and increase its global influence due to which it invested a lot in risky countries. From 2020-21, it renegotiated more than 50 billion dollars in debt. Most countries are unable to pay. It has surpassed the World Bank and IMF as a source of development credit. 

This initiative however could go both ways. The investments could turn fruitful and give China the influence it wanted, or worsen China’s dire state economically.

Zero Covid Policy

The Chinese government's zero covid policy has worsened things. The death toll from China is a little over 5000, compared to a million in the USA. However, keeping lockdowns has led to zero herd immunity among the Chinese. A negative covid result is required for even basic things like going to school, shopping or eating out. The government announced that the covid policy could go on for more than 5 years. This has led to civil unrest. 

The massive decline in internal demand, and increasing unemployment are consequences of this policy. The weakening of confidence in China amongst businesses, for example, Apple moving to India for manufacturing is also a result of the same.

Youth Uprising

Increasing unemployment is on the rise. It rose to around 20 per cent in the last year. 

Tang ping, which translates to "lie flat," basically was an online movement of Youth who chose to stop playing the rat race and take things more slowly, but now in 2022 this has evolved into something new, a more extreme movement known as Bailon, which translates to "to let it rot." These youth have decided to give up on the system entirely and are just doing the bare minimum to get by.

The Chinese govt has been trying to change the general consensus on this by focusing on big tech and banning private school tutoring but has failed to bring any results.

Impact

Apart from the above-mentioned major issues, China continues to face innumerable issues happening in the backdrop such as the rural bank run where thousands of people are unable to access their life savings.

China today is focusing more on the political agenda over humanitarian and economic issues. Which is leading to cracks in the foundation of the country. This would lead to recessions and political issues in the coming years. The government desperately needs to regain the trust of the people to tackle the civil unrest that would come along.

These problems in China would lead to ripple effects on the import-export spectrum of the world. Countries like Australia, whose exports to China account for more than half of total exports, would be negatively impacted. It may have an impact on 20% of USA imports overall. Decreased supply would result in a continuation of the inflationary trend. The focus of countries will shift to domestic production. Since China is the supplier of lithium-ion batteries, certain businesses, such as EV batteries, will be hit. Many nations are exposed to Chinese debt and stocks. The delisting of Chinese equities have already led to severe losses for funds.

China holds a significant role in all of the connected international markets, therefore this would hold major consequences for all of them.