Need to Know

September 06, 2023

Cracks in the Tent Pole

China

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For the past 25 years, pundits in the West have been issuing dire warnings about China’s economy surpassing that of the United States, a shift that they feared would herald a new China-led global geopolitical system.

Today, however, China’s economy – the second largest in the world – is stalling. Now pundits are wondering whether it might collapse and trigger other worldwide effects. “Instead of marveling at China’s prosperity miracle, economists are now pondering whether China’s woes will bring down other parts of the global economy,” wrote Yahoo! Finance senior columnist Rick Newman.

Describing the Chinese economy as a “ticking time bomb,” the BBC noted how economic growth has slowed, youth unemployment has hit record highs, foreign investment has dropped off a cliff, exports are weak, the currency is weak, and, perhaps most importantly, the real estate sector is in crisis.

The Chinese government flooded the property sector with cash over the last few decades. Today, 70 percent of Chinese citizens’ wealth is tied up in real estate, Reuters explained.

But, as the empty, half-built apartments and commercial complexes that dot China attest, some of that money was wasted. Harsh coronavirus lockdown rules further undermined the sector. Low population growth means things won’t likely improve anytime soon. The central government recently imposed new rules that aimed to constrain lending and contain the crisis. They likely made it worse, though, in part because China’s communist-run financial system is corrupt and inflexible.

Massive real estate developer Country Garden, for example, is now facing default on its debts after suffering a $6.7 billion loss in the first half of the year, added Newsweek. Observers fear the company could become another Evergrande, which has lost 99 percent of its share value in the last three years while owing creditors almost $330 billion, as the Guardian outlined.

In early September, Chinese officials announced new measures to help. They cut minimum down payments for mortgages to 20 percent for first-time homebuyers and 30 percent for second-time homebuyers, wrote CNN. Forty percent down payments were previously the norm. Officials also slashed mortgage rates to boost lending and investment.

Publicly, however, Chinese leaders have broadcasted optimistic propaganda to push back against the sense of doom and gloom that pervades the country, reported the New York Times. They also decided not to publish new statistics on youth unemployment and other trends that might embarrass Chinese President Xi Jinping, who has accumulated more power during his rule than any other Chinese leader, according to Time magazine.

That is harming the Chinese economy, say analysts.

“The government’s pursuit of total control has set the country on a path of slower growth and created multiplying pockets of dissatisfaction,” Ian Johnson, a senior fellow at the Council on Foreign Relations, wrote in Foreign Affairs. “These economic problems are part of a broader process of political ossification and ideological hardening … it is difficult to miss the signs of a new national stasis.”

At the same time, China has become “uninvestable” for foreign investors because it is too risky, especially in light of raids on foreign businesses, exit bans of executives and “opaque” penalties, wrote the Washington Post.

“China needs to recognize that they can no longer rely on the sheer mass of their market to attract that type of foreign investment,” Naomi Wilson, vice president of policy, Asia and global trade at the Information Technology Industry Council, told the Post. “Even among Chinese companies, there have been efforts to relocate outside of China.”

The country that used to be the tent pole for the global economy is snapping.

This story originally appeared in the September 06, 2023 newsletter, Cracks in the Tent Pole.