cHina has reached a point of no return in its battle to contain what could be the biggest real estate crash the world has ever seen, experts warn, putting the country’s communist leadership and global economy at risk.
As Western countries stand on the brink of a potentially devastating recession next year, China is also facing a recession thanks to a “total collapse” of confidence among ordinary people in Booming housing marketthe continuing ruin of Beijing Strict strategy against corona virus And the intense heat wave affecting energy and food supply.
Alarm is spreading in China that difficult times are looming, with Huawei CEO Ren Zhengfei caused quite a stir this week When he warned that the cold from the economic downturn “will be felt by all” over the next decade.
But just as it has become impossible for President Xi Jinping to be overturned Mass closures that have hampered economic activityIt also seems increasingly unlikely that he and his politburo will reverse the crackdown on reckless lending in the property market that has led to a 40% drop in home sales this year.
The Chinese housing market has led growth over the past two decades and now represents the world’s largest asset class, with a nominal value of between $55 trillion (£47 trillion) and $60 trillion, which is greater than total US equity capitalization. Market. Now developers are going bankrupt after being denied easy credit, prices are dropping, and homeowners are too Refusal to pay off mortgages on unfinished homes Stagnation in real estate being sold and construction crippled local governments that depend on land sales for income.
Gabriel Wildau, a China expert at global consultancy Teneo, says Beijing is facing a tough moment over whether to reverse the crackdown on lending or redouble its attempts to “tame the monster” of unproductive construction activity that has spawned ghost cities and airports, as well as roads to nowhere. .
The government faces a difficult choice. But it’s like zero covid. They got there so far and they can’t go back because then it seems like a miscalculation or a mistake in policy,” Wildau said.
“This is where rubber hits the road. They want more growth in high-tech and don’t want a lot of real estate, but what is replacing that? There has been a complete collapse of confidence in the housing market. No industry can survive that.”
The attempt to revitalize the economy has been the focus of a massive package of measures Beijing unveiled last week, including 300 billion yuan (£37 billion) in spending on new infrastructure and a 500 billion yuan extension of borrowing for local governments. Economists said the stimulus was expected and may not have a significant impact in an economy already awash in investment finance. What is needed, they say, is for Chinese households to have more cash on hand to rebalance the economy away from the tired old investment model. However, such policies are politically difficult as they threaten the well-established system of powerful party cadres, central state-owned enterprises, and local government bangers.
Wildau says Beijing has the money and technocratic know-how to save the real estate sector, but that it would be “too expensive”. So far it appears as though Xi, despite the chaos that has erupted, is sticking to a plan to stamp out excesses and ensure “houses to live in” rather than speculation.
China’s export industries have held up well so far, and despite trade wars and shutdowns, the country has actually done well Increased share of global manufacturing since the epidemic began. However, this is at risk as demand from around the world appears likely to roll off a cliff over the next 12 months in a feedback loop that poses a greater risk to China.
As Ren’s comments on Huawei’s prospects make clear, it is not only China that faces uncertainty. Russia’s throttling of gas supplies and Western sanctions imposed over its invasion of Ukraine are fueling hyperinflation And the stunted growth, threatening a bleak winter for advanced economies from the United States to Europe, and from Japan to South Korea. The worst cost-of-living crisis in nearly 50 years is slowly sweeping through Western countries and it appears that it will surely lead to lower demand for goods made in China as families have to focus on necessities like food and fuel. On Friday, US Federal Reserve Chairman Jerome Powell shook up stock markets by saying there would be Pain for families and businesses He also indicated that the central bank will continue to raise interest rates until inflation is overcome.
Declining external demand is the “next shoe to take” for China, according to David Llewellyn Smith, chief strategist at investment and asset management firm Nucelus Wealth in Melbourne, and will leave China in a precarious state.
The private sector is being hit hard by Omicron, the external sector is being hit by global weakness, and the public sector is doing its best to offset the recession but is facing many obstacles in fiscal policy. It is a very toxic combination for China. It’s very difficult to manage.”
“The Chinese recession is definitely in the frame over the next year. This will have incredible implications for global markets of all kinds.”
How the world feels about the cold that Ren warned about is not clear, but it does add an unknown factor to an already dangerous mix of issues, says Roland Raga, lead economist at the Lowy Institute, a think tank in Australia. These include: rising geopolitical volatility. fragile supply chains; Political dysfunction in the United States. Digital disruption and the accelerating effects of climate change. The challenges have even prompted the French president, Emmanuel Macron, to join the bleak forecast by saying that we are witnessing the “end of plenty”.
Back in the global financial crisis of 2008-2009, China set out to bail out the global economy with a stimulus of 4 trillion yuan. But with Beijing in the process of decoupling from the Western-led world order and debt-fuelled growth, another Chinese bailout appears highly unlikely. Instead, China faces Japan-style “lost decades” as it tries to suck up billions of dollars in failed property loans.
“In the short term, China’s economy is taking a hit,” Raja says. It remains to be seen what the consequences may be in the medium to long term. But China also faces very significant long-term headwinds from demographic decline and aging, state encroachment, and its increasingly difficult foreign relations.”
And with China reaching the point of no return in the housing crisis, the global economy itself is also at a crossroads. “The global economy appears to be going through a tipping point, although it also remains in flux as things can still go in any number of directions,” Raja says. “People have to prepare for a more uncertain world, but we also need to expect more. From our politicians and policy makers, because the need for prudent policy is growing more and more.”