China’s economy has received a steady stream of negative news over the past six months, including poor growth, record-high youth unemployment, low levels of foreign investment, weak exports and the currency, and a struggling real estate market.
The second-largest economy in the world was referred to as “a ticking time bomb” by US President Joe Biden, who foresaw rising unrest in the nation.
Xi Jinping, the leader of China, retaliated by defending the economy’s “strong resilience, tremendous potential, and great vitality.”
So, Mr. Biden or Mr. Xi, who is correct? The solution most likely lies somewhere in the middle, as is frequently the case.
Although the economy is not going to collapse very soon, China confronts enormous, systemic difficulties.
A real estate crisis and lower-income households
The property market in China is at the heart of its economic issues. Up until recently, a third of its total wealth was derived from real estate.
“This was illogical. No logic at all, argues Antonio Fatas, an economics professor at Singapore’s INSEAD business school.
The industry prospered for two decades as developers rode the privatization wave. However, a catastrophe arose in 2020. A persistent housing construction program is not a good idea in the midst of a global epidemic and a domestic population decline.
The government subsequently imposed restrictions on the amount developers may borrow out of concern about a US-style 2008 catastrophe. They soon owed billions that they were unable to repay.
Now that housing demand has fallen, prices for real estate have soared. After three years of tight coronavirus restrictions, this has made Chinese homeowners poorer.
According to Alicia Garcia-Herrero, head Asia economist at wealth management company Natixis, “Property is essentially your savings in China.” Until recently, it appeared to be a better option than investing in the irrational stock market or a low-interest savings account.
It indicates that, in contrast to Western nations, there hasn’t been a post-pandemic spending boom or significant economic recovery.
According to Ms. Garcia-Herrero, “There was this notion that Chinese people would spend like crazy after zero-Covid.” They would visit Paris, travel, and purchase the Eiffel Tower. However, they truly were aware that the decline in housing prices would severely impact their savings, so they made the decision to cling to what money they did have.
This circumstance has compounded the country’s local governments’ debt issues in addition to making households feel poorer.
Selling land to currently bankrupt developers accounts for more than a third of their multibillion-dollar revenues, according to estimates.
Some analysts predict that it will take years for the agony associated with real estate to pass.
Unsound economic theory
The real estate crisis draws attention to issues with how China’s economy runs.
Building was the driving force behind the nation’s astounding growth during the previous 30 years, including factories, airports, roads, bridges, and train lines. Local governments are in charge of carrying this out.
Some economists claim that this strategy is, both metaphorically and physically, beginning to run out of road.
In Yunnan province, close to the Myanmar border, one of the more odd manifestations of China’s obsession with construction may be discovered. Officials there bafflingly announced this year that they will move forward with their plans to erect a brand-new multimillion-dollar COVID-19 quarantine facility.
The truth is that China can only develop so much before it starts to be a waste of money. The nation must find another means to bring wealth to its citizens.
