China’s 2022 Economy: A Paper Dragon Burning?

Beijing will struggle to manage an economic downturn that most assuredly is getting worse
January 14, 2022 Updated: January 17, 2022

Commentary

How will China’s economy perform in 2022?

Under the current economic outlook, that question weighs heavily on the minds of China’s leadership. One short answer is, “It depends on who you ask.” But a much more honest one would be, “Much less than Beijing needs.”

Beijing Managing Expectations

Of course, if you ask the Chinese Communist Party (CCP), the answer will be aspirational. That’s because only the CCP can guide the nation into a bright and prosperous future, as the official Party line goes. Without a thriving economy, the CCP has no legitimate authority—and everybody knows it.

Hence, it’s no surprise that Beijing will always put its economic reporting in the best light possible–even if it’s not completely plausible to do so. To that end, the official estimate for expected growth in 2022 is in the 5.5 to 6 percent range.

But as mediocre as that would be by China’s standards over the past several decades, even 5.5 percent may be unobtainable. It’s certainly a significant downgrade from 2021’s growth target of 6 percent or more. In fact, after the post-pandemic bounce in the first half of 2021, the Chinese economy slowed in the second half. Some estimates put it at 4 percent in the fourth quarter.

Stagnation Hanging Around Real Estate Sector

Beijing would certainly prefer a frothier number for 2022, but the threat of stagnation in key economic sectors is real and growing, so even 5.5 percent is looking like a tough target to hit.

Property development is a major driver of China’s economy, but it has yet to hit bottom as the Evergrande contagion continues to unfold. Things are still getting worse in that sector, rather than better. Knocking down a few dozen high rises in an unfinished development won’t solve the problem. But it may well foreshadow things to come.

In addition to Evergrande, other real estate firms are finding themselves in financial hot water. Kaisa Group, Fantasia Holdings, Modern Land (China), and others have all defaulted on both domestic and offshore bond payments.

Although the CCP is trying to preserve the major players in the sector with financial bailouts of one sort or another, no amount of financial jiggery-pokery will be enough to salvage a string of massively over-leveraged development companies.

Sleight of Hand Won’t Be Enough to Conceal Debt Crisis

Beijing’s financial sleight of hand may, on paper, “save” some companies with rate cuts, massive restructuring, and state ownership—but more defaults, soft or otherwise, are likely to occur. Nor will the CCP be able to blunt the overall effect of the crashing real estate market on the economy as a whole. Up to one-third of development firms are expected to find themselves underwater in 2022.

In fact, the ripple effect could be stronger and more widespread than anticipated. This isn’t as new or as speculative as one might imagine. Recall how the crashing real estate market in the United States, which made up less than 10 percent of the country’s gross domestic product (GDP), triggered a system-wide financial crisis. Real estate housing development and related services make up about 30 percent of China’s GDP.

According to Ting Lu, Nomura’s chief China economist, China’s entire 2022 GDP could be just 4.3 percent, about 20 percent less than even the Party’s dialed-back expectations.

Municipal Bond Crash Coming Next?

But the housing market isn’t the only red flag in China’s economic forecast. Local government funding vehicles (LGFVs), which are essentially municipal bond issuers backstopping otherwise unfunded local property and regional development projects, are also deeply underwater. By the end of 2020, unpaid debt was at about $8 trillion, or half of China’s GDP. In 2021, LGFVs surpassed developers in foreign debt, owing offshore bondholders $31 billion in bond payments that will be payable in 2022.

Land Sales and Housing Prices Continue to Fall

New land sales are expected to fall another 20 percent in 2022, even after a disastrous year in 2021 in which land sales fell by 17 percent year-over-year, with values dropping by an average of 9 percent. In an effort to shore up the ugly debt scenario, local ratings services are fudging credit ratings.

How effective that is or how long that charade will last remains to be seen. But such a deceptive exercise in itself is quite telling as to where things stand today–and where they’re headed. That’s particularly relevant considering that residential housing prices fell in December 2021 for the third month in a row, and home sales are likely to drop another 10 percent in 2022.

There’s little question that the property crisis is ongoing.

CCP Virus Comes Home to Roost

To make things worse, the CCP virus has found its way back home to China just in time for the Winter Olympic Games. Regardless of what brief diversion the games may bring, Beijing’s zero-tolerance policy means that lockdowns and other stringent containment measures will squelch productivity. Disruptions to production, shipping, and consumer spending translate into even less economic activity.

Epoch Times Photo
People line up for nucleic acid testing during citywide mass testing for COVID-19 in Tianjin, China, on Jan. 9, 2022. (CNS photo via Reuters)

With the potential for additional outbreaks in the next several months, retail sales may only grow by 3.7 percent in 2022, a measly one-quarter of 2021’s 13 percent growth. That not only translates into just a fraction of the demand for goods, but also into a high savings rate and negative consumer sentiment. Consumer confidence hasn’t fallen this fast since the outbreak of the CCP virus.

Tech Firms Fleeing China Amid Crackdown

Finally, in what bodes poorly in the long term, a rising number of offshore tech companies are leaving China—for good. These aren’t small potatoes, either. Giants such as Yahoo, LinkedIn, Epic Games, and others are quickly making their way out of China in response to Beijing’s tech crackdown on Alibaba, Didi, and Meituan. The regulatory climate has become much more difficult to operate in and violations are prohibitively expensive.

Beijing may try to put a good face on its economic prospects for 2022, and the Winter Games will help with that effort. But the fallout in the economy as a whole from these factors and others has yet to be fully realized.

China’s downward economic spiral may prove to be a more dangerous source of contagions than its Wuhan laboratory.

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

James Gorrie
James R. Gorrie is the author of “The China Crisis” (Wiley, 2013) and writes on his blog, TheBananaRepublican.com. He is based in Southern California.