- China’s post-pandemic rebound hasn’t materialized and it faces mounting economic obstacles.
- Beijing is grappling with declining trade and foreign investment, a shaky housing market, and deflation.
- Experts say most of China’s issues are self-inflicted, and warn that policies must change to improve confidence.
The world’s second-largest economy isn’t growing, producing, or trading as much as it usually does.
The pandemic rebound that China and the rest of the world were anticipating has yet to materialize, and official data suggests there’s a long road ahead before the economy is back on its feet.
China’s National Bureau of Statistics announced Wednesday that consumer prices dropped annually in July for the first time in two years, dipping 0.3%, just slightly better than median estimates for a 0.4% decrease.
The People’s Bank of China is now facing the opposite problem of the Federal Reserve, which has tightened policy for 18 months in a bid to tame soaring prices. Deflation — the trend of prices falling throughout the economy — presents a particularly dangerous trajectory for China, which carries a massive amount of debt.
“Deflation means the real value of debt goes up,” David Dollar, a senior fellow at the Brookings Institute’s China center, told Insider. “High inflation we know is bad, but it does help manage debt burdens over time. Deflation does the opposite.”
Bloomberg estimates total household, business, and government debt at about 282% of annual economic output.
The latest figures add to the anxiety that’s already been swirling about what growth could look like for the rest of the year, and JPMorgan strategists cautioned that China risks a 1990s-style “Japanification” if policymakers don’t address the housing market, financial imbalances, and aging demographics.
Officials in Beijing have urged experts not to portray data unfavorably, according to the Financial Times, asking economists to “interpret bad news from a positive light.”
The numbers make this difficult:
- Year-to-date, China’s exports are down 5% compared to last year, while imports have dipped 7.6%
- Manufacturing activity has contracted for four straight months
- July exports declined at the sharpest rate in three years, at 14.5% annually
“Before the pandemic, China was growing at about 6%, and now it’s struggling to recover,” Dollar said. “Consumption really didn’t hold up coming out of the lockdown. The main components of GDP on the demand side — consumption, investment, net exports — they all have serious problems right now.”
Politicization of the economy
Increasingly, China’s US-led Western trade partners have turned elsewhere. Global demand for Chinese goods has cooled, even as Russia ramps up trade with Asia amid its war in Ukraine.
As China’s property crisis plagues its economy and financial system, is a ‘Lehman Moment’ looming?
Two years after the bond default by one of China’s biggest real estate developers created the first shock waves, Beijing’s promise that everything is under control is becoming increasingly harder to sell to investors.
Fears jumped further this summer as ailing developer China Evergrande Group then reported a combined loss of 812 billion yuan (US$112 billion) for 2021 and 2022 – a figure higher than its total earnings since it was established in 1996.
Its bankruptcy protection application filed in a US court last week also grabbed significant attention on Chinese social media.
The Chapter 15 petition, which referenced restructuring proceedings being carried out in Hong Kong and the Cayman Islands, also raises a multitude of questions for Beijing.
How can it comfort hundreds of thousands of people who are making mortgage payments for homes that have not been delivered? How can it appease worried investors who are shunning Chinese equities? How can it turn around a growing number of bearish views about China’s financial system and its economic growth?
Global investors, Chinese homebuyers and economists are now holding their breath to see which domino will be the next to fall, and what tools Beijing can use to prevent its own so-called Lehman moment – a phase drawn from the late 2008 bankruptcy of global investment bank Lehman Brothers to describe the trigger of a systemic risk outbreak.
The debt time bomb is also now ticking as Country Garden, one of China’s top five developers, is on the verge of a bond default after estimating losses ranging between 45 billion yuan and 55 billion yuan for the first half of 2023.
“In a state banking system, the authorities can move liabilities around the financial system and use ‘extend and pretend’ accounting” – George Magnus
And dozens of private developers in China could also follow suit.
“I don’t think there’ll be a Lehman moment,” said George Magnus, a research associate at Oxford University’s China Centre.
“In a state banking system, the authorities can move liabilities around the financial system and use ‘extend and pretend’ accounting to ensure that major banks don’t fail and that smaller ones can be made good or merged as necessary.”