­­A Growth Dilemma: China on an Economic Seesaw

October 20, 2019 Updated: October 20, 2019

NEWS COMMENTARY

The decline in the Chinese economy is a natural consequence of the Chinese Communist Party (CCP)’s blind and relentless pursuit of high growth. 

Gone are the days of temporary­­­ prosperity driven by exports and real estate prices. Now Beijing is trying desperately to sustain the economy by playing a dangerous seesaw game between soaring housing prices and declining consumption. 

This is an unfulfilling and ineffective last resort that will fail to stop or hide the increasingly obvious deceleration of the Chinese economy.

From Growth Frenzy to Growth Dilemma

A country’s economic growth relies on three factors, often referred to as the three-horse-carriage. They are exportation, consumption, and investment. Economic growth would slow down significantly when one or two of the horses lose mobility. If all three fail, the economy can’t go far.

The Chinese economy today is just like a carriage without a horse. Due to the recent deterioration of the China-U.S. relationship, China’s exports have suffered significant losses with the August export volume down 4.3 percent compared to last year, the first decline in nearly three years. In the meantime both investment and consumption also deflated. Real estate investment growth has slowed for four consecutive months, and August manufacturing activity declined by 1.6 percent compared to a year ago. Consumer buying power has also been weakening. While Chinese authorities had to admit to the downward trend, they are unwilling to acknowledge that the past frenzy for high growth is the true cause of today’s decline.

Let’s first discuss the absurdity of China’s export gold rush. After China joined the WTO in 2001, it has relied on exports to pump up its economy. Between 2003 and 2007, China’s exports increased by 25 percent each year.

China’s foreign trade dependence (or FTD, ratio of the total amount of foreign trade of a country to its GDP) soared from 38.5 percent in 2001 to 67 percent by 2006, more than four times as high as Japan’s peak FTD towards the end of its asset price bubble era. Drunk withthe its effortless prosperity, China did not realize such export-reliant growth is not only unsustainable, but also very fragile.

Can a country maintain a 25 percent annual export growth rate for decades? Obviously not. For a very small country with low export volume, theoretically it may be possible to maintain a longer term trade surplus. But for a large country like China, with 26 percent of the world’s work force, the global market is too small for it to maintain long term export growth even if all other industrialized countries stopped exporting. From an international economic balance standpoint, trade is only sustainable when both parties benefit from it. If China was the only winner with a permanent trade surplus over all other countries, will any country have the ability to continuous importing from China? This is simply unrealistic. So it’s only a matter of time for such export growth to end.

Unsurprisingly, China’s exports started to weaken around 2012, and its aggressive expansion in the United States and its infringement of U.S. intellectual property led to the trade war last year. For China, this marks the end of many years’ practice of amassing foreign exchange reserves through hundreds of billions of dollars’ trade surplus with the United States. In hindsight, the trade war was easily foreseeable.

Let’s now look at how the real estate bubble was created. China started to push real estate development in 2008 in order to drive economic growth. In the past decade, the rapid inflation of the real estate bubble has led to a market where supply far exceeds demand. 

It also created an abnormally developed industry chain around real estate. Local governments raised debts to build infrastructure to enable real estate development. There’s also a potential financial crisis brewing due to its reliance on real estate among banks and private lenders. Today the real estate-led growth strategy has come to an end.

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Beijing often reminds the world that China’s billion-plus population equals a high consumption potential to spur and maintain economic growth. However, the Chinese business community has been apprehensive because they don’t see business opportunities. Most of them did not realize that they are witnessing the materialization of the bitter aftermath of the CCP’s irresponsible real estate policy.

The high housing prices resulting from the real estate bubble have long been crushing Chinese consumers’ buying power. Beijing’s fear of a severe financial crisis has put the Chinese economy on a dangerous seesaw with the real estate bubble on one end and domestic consumption on the other. While juggling the waxes and wanes of the two factors, Beijing issues empty promises about stimulating economy with consumption.

To be more specific, if housing prices continue to grow (becoming more unaffordable) consumers will have no choice but to reduce spending, which will lead to lower consumption. 

On the other hand if housing prices drop significantly, banks will be swamped with bad debt, while mortgage borrowers will be underwater (debt higher is than house value). In this case, though new real estate buyers may have higher consumption power due to a lower housing prices, the middle class who often own multiple properties will experience major asset loss, leading to the seesaw leaning in the opposite direction. Whichever side is lower, it’s just two different scenarios of economic adversities, and neither will lead to a way out of the dilemma.

Household Debts Stifling Consumption

The Bank of China’s Research Institute admitted in a Sept. 25 report that “the downward pressure on China’s economy has been increasing significantly” because of “subdued domestic demand.” 

Since 2015, Chinese consumers’ household debt to disposable income ratio rapidly rose from 89 percent to 120 percent, a 10-percentage-point annual increase. The ratio seems to be a taboo metric in China, with researchers often combining households with debt and those without to get a lower debt ratio.

However, China’s Financial Times revealed in April that a 2017 survey revealed that Chinese consumers’ debt-service coverage ratio (DSCR) is higher than developed countries like UK, the United States, Japan, France, and Germany. To many Chinese urban families, debt payment obligations have largely compressed their budget.

Car purchases account for only a small portion of household debts. According to the Chinese People’s Bank, 61.4 percent of the 52.8 trillion yuan annual loans to residents are consumptive mid/long term loans, or housing mortgages. Unsurprisingly, the Chinese borrow primarily to purchase real estate.

As the high housing prices and mortgages bleed dry Chinese consumers’ wallets, consumption power naturally withers. Not only are Chinese millennials impacted, their parents also suffer because they often have to help fund the down payment.

Stabilize the Economy by Seesawing?

Today the CCP’s strategy is to keep the seesaw level. On the one hand, Beijing has been trying to control housing prices to avoid suppressing purchase power; on the other hand, it has launched various policies (eg. alternative fuel vehicles, rural car purchase incentives, and promotions to upgrading appliances) to stimulate consumer spending.

But just like the official Chinese media said, such stimulus policies are far less effective than expected. Simply put, the Chinese have to take on too much debt to incrementally increase consumption.

No doubt, the seesaw game will generate little lift for the economy. Any child who ever played on a seesaw knows how difficult it is to keep the board level. However, the CCP has really no other way to try to rebuild the economy.

In today’s China, the downward economic trend has become a problem with no obvious solution. The economic slowdown will become only more serious in time. 

For the CCP, the annoying economic hardship has become a new norm that the party doesn’t want to admit.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

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