Is China’s 40-year growth model deteriorating?

As consumer prices fall in China, the world’s second-largest economy, the housing crisis deepens. While exports are in decline, youth unemployment in the world’s most populous country is on the rise.

The real estate crisis, excessive indebtedness, weak growth and the growth guarantee of the global economy are causing increased concern in the markets for the Chinese economy.

Renewed turmoil in China’s troubled real estate sector and “disappointing” economic data fuel fears about the stability of the world’s second-largest economy, as the crisis threatens to spill over into financial markets.

The Chinese economy grew only 0.8 percent in the second quarter of the year compared with the previous quarter. On average, experts expect economic growth of just 2-3 percent over the next decade.

REAL ESTATE RISK

Experts say the biggest risk to the Chinese economy comes from the bloated real estate sector, which has so far accounted for almost a quarter of its economic output.

Evergrande, whose payment imbalance has been making headlines since 2020, filed for bankruptcy in the US last week, while rival Country Garden also announced it was experiencing payment difficulties.

While the sharp economic slowdown in the country and the problems caused by high debt levels, especially in local governments and the real estate sector, have reached an unprecedented scale, the Chinese authorities are also known to have a remarkable track record. to achieve economic crises. under control.

While the authorities in China are trying to calm nervous investors, it is also worth noting that the People’s Bank of China is trying to eliminate recent problems with interest rate cuts.

The bank announced after meeting with finance and securities regulators on August 20 that it would coordinate its financial assistance to resolve the debt problems of the country’s local governments.

The People’s Bank of China, which has instructed major banks to increase their lending volumes, had to take support measures last week when the yuan depreciated against the dollar.

On August 21, the People’s Bank of China also lowered the interest rate on the one-year home loan in efforts to support the economy. In addition, the bank surprised the markets by not changing the five-year interest rate.

LOW GROWTH RATES A GLOBAL PROBLEM

While the promise of ever-increasing prosperity since 1990 has been the most important legitimacy for the ruling Communist Party, it is also claimed that low growth figures may become a problem for the Chinese government in the long run.

Some experts warn of a long-term recession, pointing to falling property prices, the start of deflation and rising debt.

Some experts think that the Chinese model is not about to collapse and it is too early for that.

The growing lack of transparency is also seen as a source of uncertainty. Allegedly, the country’s authorities hide more and more data, most recently on youth unemployment, which has already reached record levels.

In addition, the country’s leading economists are asked not to comment negatively on the economic situation.

I WANTED PATIENCE

Despite being at Christmas time, it should be noted that there has been a lot of activity among the Beijing authorities in recent weeks.

As authorities constantly come up with new plans to support the economy, 31 proposals to strengthen the private sector, 20 measures to stimulate consumption, 26 ideas to create more jobs and 24 points to improve the environment for foreign investors have been announced.

Chinese President Xi Jinping recently urged the Chinese to maintain “historic patience.”
Xi said that instead of seeking short-term material well-being, the country should focus on long-term goals such as improving education, medical care and food supply.

WHY IS THE CHINESE ECONOMY IN TROUBLE?

While experts say the world’s second-largest economy is under “severe downward pressure”, hopes of a strong recovery from the devastating consequences of the “case zero” policy against Covid-19 are fading. .

While the real estate sector, weak private consumption and declining confidence in the private sector, which came under pressure from slowing growth in the Chinese economy, it should be noted that exports have declined recently as a result of the slowdown in the World economy. .

The Chinese government continues with its goal of increasing domestic consumption so that its economy is less dependent on external influences.

But the strict Covid-19 zero policy, as well as the housing crisis and uncertainty about further economic development, are making private households nervous and forcing them to save.

Household savings increased by $2.6 trillion in the first seven months of 2023, according to data from the People’s Bank of China.

Saying that it is no coincidence that so many problems are experienced in the Chinese economy at the same time, experts remind that systematic imbalances can often escalate to breaking point.

The Chinese economy has grown since the 2008 financial crisis, mainly thanks to private and public investment in infrastructure and real estate.

They directly and indirectly provided up to a third of economic output. The indirect contribution is cited as the many industries that benefit from the construction boom, such as the chemical and raw materials industries, as well as manufacturers of household appliances and furniture.

Economists have long criticized this model of growth as unsustainable.

LOCAL GOVERNMENT DEBT

China’s debt amounts to almost 300 percent of the country’s GDP in 2022, according to data from the Bank for International Settlements (BIS). Local governments make up a large part of it. The debt in question was 200 percent below its GDP in 2012.

In the last 10 years, local governments have kept the local economy alive by investing heavily in infrastructure, mainly on credit. This also increased the debt.

Expenses were financed with income from the sale of land for construction projects. But due to the real estate crisis, the demand for land fell and the income decreased. In the Covid-19 outbreak, local government spending such as “Covid-19 tests” increased the debts in question.

WHY IS IT THREATENING THE GLOBAL ECONOMY?

China, the world’s second largest economy, has been one of the most important engines of global economic growth over the past two decades.

By contrast, China has benefited greatly from the demand for its products from abroad. China’s GDP reached 59.3 trillion yuan (about 8.31 trillion US dollars) in the first half.

The International Monetary Fund (IMF) estimates that by 2023, China will contribute nearly 35 percent of global growth so far.

The problems of the Chinese economy have also recently affected international capital markets. Faced with acute problems facing big property developers, some investors even fear a new “Lehman tragedy”.

The failure of investment bank Lehman Brothers in the US in 2008 had a ripple effect on other banks and was seen as one of the triggers for the global financial crisis. (AA)