The Chinese Economy Is In Jeopardy. What Actually Is Wrong With The Chinese Economy?

The growth engine of the world has traditionally been China. However, in recent weeks, the downturn in its economy has frightened world leaders and investors, who are no longer relying on it to be a counterweight to weakness elsewhere. In actuality, the second largest economy in the world is the cause of the issue for the first time in decades.

The Hang Seng (HSI) Index of Hong Kong entered a bear market on Friday after losing more than 20% since its most recent peak in January. The Chinese yuan hit its lowest point in 16 years last week, leading the central bank to launch its most aggressive defence of the currency to date by setting a rate to the dollar that was far higher than the anticipated market value.

The problem is that growth has stalled after an early-year surge in activity following the easing of Covid lockdowns. The real estate crisis is becoming worse, consumer prices are dropping, and exports are declining. Youth unemployment has gotten so terrible that the government no longer releases the statistics.

To make matters worse, two well-known investment firms and a major homebuilder recently failed to make payments to investors, reigniting worries that increased threats to financial stability could result from the housing market’s continuing decline.

Several big investment banks have reduced their projections for China’s economic growth to due to a lack of decisive actions to boost domestic demand and concerns about contagion.

“We lower our prediction for real GDP growth in China… External demand has fallen further as the real estate downturn has gotten worse, and governmental support has been less than anticipated, according to UBS analysts’ research report from Monday.

Prior to this, analysts at Nomura, Morgan Stanley, and Barclays revised their projections.

Therefore, China may considerably miss its stated goal of “around 5.5%” growth, which would be embarrassing for President Xi Jinping’s administration.

The global financial crisis of 2008, when China introduced the greatest stimulus package ever and became the first significant economy to recover from the crisis, is a long cry from the current situation. In the early stages of the pandemic, China was the only significant developed country to avoid a recession. What then went wrong?

Property Problems

Since April, when the impetus from a great start to the year evaporated, China’s economy has been in a slump. However, due to defaults by Zhongrong Trust, a leading trust organization, and Country Garden, once the nation’s largest developer by property sales, worries have grown this month.

Investors were alarmed by reports that Country Garden had neglected to make interest payments on two US dollar bonds, which brought back memories of Evergrande, whose financial defaults in 2021 heralded the beginning of the real estate crisis.

Even while Evergrande is still restructuring its debt, Country Garden’s problems have renewed fears about the Chinese economy.

Beijing has implemented a slew of encouraging policies to boost the housing industry. However, even the more powerful players are currently on the verge of default, highlighting the difficulties Beijing will confront in trying to contain the crisis.