1692531285 China is nearing the end of its brick and debt ridden

China is nearing the end of its brick and debt-ridden economic miracle

“For reasons I’ve never understood, people like to hear that the world is going to hell.” If there’s one country to which American economist and historian Deirdre McCloskey’s phrase can be applied uniquely, it’s China. A glance at the newspaper library is enough to confirm that she was a regular target of the prophets of the apocalypse: the end of their long period of economic prosperity – apart from the Corona crisis – was so often predicted too early that each New Omen sounds like unfounded alarmism. But a summer full of bad news, sharp falls in exports, the threat of deflation and a real estate crisis, as well as structural problems such as high levels of debt and rapid aging of the population – India has taken the demographic throne this year and the average age continues to rise, with the The percentage of people over 65 years of age has doubled from 7% to 14% of the total since 2000 – reducing the available labor force and making it more expensive, has brought the debate back to the fore. And if this time it’s true that the Chinese miracle is nearing its end?

At least the world’s second largest economy, which has contributed most to global growth since the financial crisis, is showing signs of weakness. The yuan depreciated against the dollar this week to where it was 16 years ago. And while GDP growth rates remain resilient relative to developed markets — expected to increase by around 5% this year — they are a far cry from the 7%-plus growth they have achieved spectacularly in recent decades. Forecasts assume that the slowdown will continue.

This makes it difficult to close the still significant income gap between the average income of a Chinese citizen and that of the major powers. Chinese per capita incomes of more than 1,400 million do not reach $13,000, compared with nearly 30,000 in Spain and 76,000 in the United States. For several years, some have warned that if China slows, it risks falling into the so-called middle-income trap. This trap occurs when wages are too high to compete with countries with cheap labor and innovation is not at the cutting edge to increase productivity at the top of the value chain and meet the US and Europe in person.

“We believe that China will not surpass the United States’ GDP,” says Ignacio de la Torre, chief economist at Arcano Research, contradicting one of the most repeated forecasts in recent years. A headline that, according to the most optimistic forecasts, is expected sometime in the next decade. Arcano has spent two years preparing reports on the Asian giant’s predicament. In them they expect the bursting of their real estate bubble. “No one can do that better than a Spaniard,” jokes De la Torre. “The greatest danger in China is the deflationary process that occurs when assets become less valuable, which negatively impacts bank lending (bad in a credit-addicted economy) and the willingness of businesses and citizens to spend.” context in which China has a debt of more than three times its GDP, which is huge,” he adds. The analyst firm assumes that eliminating these excesses will also lead to many years of lower economic growth, with the risk of a vicious circle culminating in a financial crisis in the medium term.

The latest inflation data set off alarms. As the fight against price hikes continues in the West, Beijing is grappling with an equally dangerous reversal of this phenomenon: negative prices, which highlight weakness in internal and external demand and encourage the specter of deflation in an environment of high inventories and oversupply of goods. The consumer price index fell 0.3% yoy in July after data were flat the previous month.

Exports do not carburize either. They fell 14.5% in July, their third straight month down after international demand normalized from the post-pandemic boom. It is the worst value since February 2020 for the so-called factory worldwide. The situation has been exacerbated by the decision by many companies to diversify their Asia operations across multiple countries to avoid risk concentration only in China, as previously a process called “China+1” has been dealing with the aggressive policies of the incumbents tightened restrictions. by the government, which hampered the operation of factories or ports.

Imports also fell, in this case by 12.5%, showing the weakness of domestic consumption. “Faced with weak domestic demand amid a struggling real estate sector and weakened consumer confidence, Chinese policymakers may choose to boost growth by encouraging overseas sales of these assets,” says an analysis by manager Pimco.

The spate of disappointing data at a time when a strong recovery was expected due to the end of Covid restrictions has prompted Chinese authorities to try to silence the numbers. According to the Financial Times, several local economists have been pressured not to hint at possible deflation. And the Bureau of Statistics has said it will stop reporting youth unemployment once it hits a record above 20% in urban areas.

watchmaker bomb

From the outside, the decline is viewed with suspicion. This week US President Joe Biden described the scenario of an economically troubled China as a “time bomb”. “It’s not good because when bad people have problems, they do bad things,” he said. Relations between Washington and Beijing are in a difficult balance: on the one hand, their leaders promised in Bali last November to steer bilateral relations. On the other hand, suspicion is high: Biden last week signed an executive order restricting his country’s investments in strategic technology areas in China, from artificial intelligence to quantum computing, to prevent the Asian country’s military equipment manufacturers from benefiting from US technology and means for its development.

On Wednesday, Chinese Premier Li Qiang stressed to the State Council (the executive branch) that there was a need to “organically combine the promotion of security and development,” a message that might allow us to read between the lines to which Authorities are turning to party cadres to focus more on promoting innovation and less on control in the face of growing uncertainty. Despite the fact that some economists blame the Asian giant’s woes on the strict zero-Covid policy – which kept the country under strict lockdown for almost three years – and increased government intervention over the past five years, says Michael Pettis, professor of finance at Peking University points out, “While it certainly doesn’t help, China’s biggest problem isn’t government intervention, but income distribution, which means domestic demand remains too weak to support business investment.”

García Herrero agrees, emphasizing that “China is not announcing major fiscal stimulus because it cannot.” The return on investment is very low and the fiscal multiplier [la herramienta que mide el impacto del gasto público sobre el PIB] does not react”. The central bank on Tuesday announced an unexpected cut in the interest rate on its one-year bank loans to 2.5%, the lowest level since 2014 and the second since June. Those figures cast doubt on whether the Asian giant will be able to meet its annual growth target, which the government has set at a prudent 5% through 2023. However, Premier Li has shown no sign that he will lower that target since Wednesday, urging to “ensure achievement of annual targets and tasks.”

Perhaps the most visible link in China’s decline is in the real estate sector. For decades, urban growth has been one of the pillars of its development, to the point that in just three years, between 2011 and 2013, it came to use more cement than the United States did in the entire 20th century, a fact difficult to digest. . The cracks in this brick-based model are already clearly visible. Skeletons of unfinished skyscrapers and broken cranes, which indicate that no one has served them in a long time, dot the landscape as you travel across the country on a bullet train. “Advancing East, Expanding South, Expanding West, Integrating North, and Prospering in the Middle” was the motto of the expansion and growth at any cost that prevailed from the 2000s onwards, after the real estate market was officially launched in 1998 national level.

As households were allowed to buy and own a home, hundreds of millions of people moved into new homes and real estate became the main driver of economic growth: land previously owned by the state became a source of wealth for local governments and helped to create a virtuous cycle: the more land was sold, the more it was increased and the more could be invested in improving the infrastructure. The misjudgment was that the economies of many small towns were not developing as rapidly as the brick sector, so that efficiency inevitably declined and debt accumulation increased. The most extreme case is Nanchang, the provincial capital of Jiangxi, where 20% of the houses built were vacant last summer, according to the Beike Research Institute of China, a rate that is 12% higher than the national average at the time.

In 2021, the Evergrande crisis, one of the major promoters unable to repay its debt, made it impossible to continue hiding the scale of the disaster. The group, founded by billionaire Xu Jiayin, who became the country’s richest man in better times, is no longer listed and is in the midst of an opaque restructuring process, but the bleeding continues: last month it announced those behind it Accounts are known to have suffered losses of more than $72,000 million over the past two years and filed for bankruptcy in the United States this Thursday.

A person walks past a Country Garden real estate building under construction in Beijing August 11.A person walks past a Country Garden real estate building under construction in Beijing August 11. TINGSHU WANG (Portal)

There was talk then of China having its Lehman moment, in reference to the US investment bank whose bankruptcy triggered the Great Recession, and now it’s talked about again. Two years after Evergrande exemplified the collapse of the sector, Country Garden, another key piece of the real estate puzzle, is also about to collapse. Another unpaid debt and a drop in sales. Its shares have fallen to yearly lows after losing more than 70% of their value so far this year. At this point, July new home prices fell 0.2% mom after remaining flat the previous month. This is the first negative reading so far this year, a fact that puts pressure on regulators to formulate support measures for the sector.

Zhang Bo, president of the Anjuke Research Institute 58, avoids going into specific cases, saying only that he expects a “moderate easing of market control policies” in the second half of the year. Already this summer, developer grants have been expanded, and 100 cities have lowered or eliminated mortgage rates and down payment rates for first- and second-home buyers. Still, Zhang believes that “there is very little room for maneuver as first mortgage rates are already at record lows in most cities.”

The fear of contagion to the rest of the economy, especially the financial sector, is there. Fears were heightened earlier this week after news that one of China’s largest trust companies, Zhongrong International Trust, has defaulted on dozens of payments for various investment products since last month. The company, traditionally heavily involved in the real estate sector, lacks a plan to do so in the near future, according to the board secretary. China’s $3 trillion shadow banking sector and further defaults by this and other companies could have a wide-ranging chilling effect on the economy and further weigh on weak investor confidence as many rely on high-yield fiat products.

Despite the size of the potential Pufo, the international impact will not be significant, according to De la Torre. “The risk of contagion to the West is limited because the Chinese capital system is closed to prevent capital flight, so Chinese banks’ interaction with Western banks is very limited.” Contagion from exports is also small, except in the case of Germany, where a higher share of GDP depends on its exports to China.”

A positive side effect of a possible Chinese shutdown has to do with energy. Less growth means less demand for oil, and that depresses prices in international markets, as explained by Julius Baer’s Yves Bonzon. “The significant risk of deflation in China is dampening demand for commodities and helping western countries maintain a sustained disinflationary trend.”

The possibility of China becoming a global disinflationary force by also selling other products, such as its electric cars, at lower than expected costs is also on the table for Pimco experts. On the contrary, a strong stimulus from Beijing to revive activity “could send global oil and gas prices higher,” according to a report by Francisco Blanch, global head of commodities and derivatives at Bank of America.

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