Western sanctions, a slow Covid reopening, and government economic crackdowns are putting the Chinese economy at risk. According to Reuters, China’s economic growth is forecasted to decrease by 0.5% between 2023 and 2024. While such a decrease may not look troubling to the outside observer, the decline marks a soon to be end to China's exponential economic growth which has lasted for the better part of 30 years.
Besides advantageous trade deals made with Russia in the aftermath of the invasion of Ukraine, there has been limited positive economic news within China. On August 17th, Evergrande, China's largest property developer, filed for bankruptcy in New York. This was done following two years of attempted financial restructuring following the developers default and subsequent financial collapse. In a 2022 estimate by The Guardian, China's property market composed 20-30% of GDP. Real estate is a big deal in China, and an over reliance on one asset class coupled with a superficial, risky, and levered economic environment poses a risk to China's ambition to become the new “world economic superpower”.
According to the Financial Times, land and home prices have fallen by 5% annually. The minimal diversification within the Chinese economy results in such a decline having a much larger effect. Built upon tranches, high interest rates (while be it declining) make paying creditors more challenging, resulting in a higher risk of default. While it is not the prime demographic for property ownership, a growing unemployment rate among young people could result in a higher vacancy rate for rental properties (and a subsequent decline in rent prices), which would negatively impact landlords who owe dues to creditors.
The current Chinese economy is a facade of growth that hides mountains of debt. Falsifying economic data, unrealistic optimism, and building ghost cities will not solve the problems from within. Rather, the implementation of regulation on developers and the creation of greater investment opportunities (both in the private and public sector) away from real estate might save the Chinese economy from collapse. Borrowing and lending with the risk of no return is not a sustainable business model. Everagrande's collapse was heard around the world, and has revealed some of the flaws of the Chinese economic system. Many economists forecast an impending global recession come late 2023 or early 2024. Through this impending event, the resilience and strength of the Chinese economy will be once again tested, with unpredictable results awaiting on the horizon.
Brennan P
Sources
https://www.theguardian.com/business/2022/sep/25/china-property-bubble-evergrande-group
https://www.ft.com/content/7beb34d5-5437-43b7-a114-3836be0d2fc5
https://www.nytimes.com/2023/09/08/opinion/china-youth-unemployment-xi.html
https://www.forbes.com/sites/earlcarr/2022/05/27/is-evergrande-actually-chinas-lehman-brothers-moment/?sh=73673f406c79
2 comments:
This is a very interesting topic. When you said that "the current Chinese economy is a facade of growth that hides mountains of debt", I feel like it could be related to how China fudged their COVID numbers to appear much safer than it actually was. Also, India's population has recently surpassed China's, and they seem to be in a better economical position than China. Their GDP growth has been much stronger. Perhaps they will also surpass China economically? When I first read your article, I'm not sure why, but I thought of China trying to take over Taiwan. I've been hearing about TSMC (Taiwan Semiconductor Manufacturing Company) and how it is one of the biggest contributors to Taiwan's economy, and how it provides chips globally. Maybe taking over TSMC is part of China's plan to takeover Taiwan, so they could boost their economy. Just some thoughts.
I agree that during the COVID-19 pandemic, China faced significant social and economic challenges. For example, lockdowns were implemented across Chinese cities as a safety measure to prevent the virus from spreading. This resulted in the closure of many small businesses, leading to job losses and economic hardship. Despite the economic slowdown, China continued to play an important role in global demand for manufacturing and infrastructure. Healthcare professionals were also working diligently to research COVID-19 vaccines and treatments to improve people's health. However, income inequality remains a concerning issue since it can disrupt social stability and economic growth. The government is still working to regulate the financial sector to stimulate China's economic growth.
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