Five Events That Impacted China’s Economy in 2022

Unfinished apartment buildings at China Evergrande Group's Health Valley development on the outskirts of Nanjing, China, on Oct. 22, 2021. (Qilai Shen/Bloomberg via Getty Images)

Analysis

Looking back at 2022, China’s economy increasingly struggled under various policies of the Chinese Communist Party (CCP). From the extreme “zero-Covid” policy to the regulations in the real estate sector, and from the waves of defaulted loans on incomplete buildings to the deterioration of exports, China’s economy has been hit hard, and many policies of the CCP authorities have undergone significant changes.

We will review five major aspects that deeply impacted China’s economy in 2022.

Continued Deterioration of the Export Industry

Exports have been one of the three pillars of China’s economy, growing by 4 percent in 2020 and 21.2 percent in 2021. In 2022, however, things changed, with exports growing by 13.2 percent in the first two quarters, or 2 percent in real terms, after adjusting for inflation.

Last year, China’s imports and exports began to shrink from October onwards. In October, the total value of imports and exports fell 0.4 percent, with exports down 0.3 percent and imports down 0.7 percent.

In November, the speed of the decline increased dramatically. Total exports of $295.5 billion fell 8.9 percent year-over-year, continuing an 8.7 percent decline from the previous month. Total imports of $226.2 billion fell 10.6 percent year-over-year, down 9.9 percent from the previous month. During that month, China’s trade with major importers fell sharply year-over-year. Exports to the United States fell 25 percent year-over-year, which was the fourth consecutive monthly decline and much larger than the 13 percent drop in October. Exports to the EU fell 10.6 percent year-on-year, while exports to Japan, South Korea, and Taiwan fell 5.6 percent, 12 percent, and 20 percent, respectively.

In the third quarter of 2022, China’s total exports to the United States fell by 27 percent, and to the EU fell by 11 percent, while China’s total exports fell by 40 percent. With the drop in exports, the number of orders is also scarce, and many factories have sent their workers home early from work.

As the United States reduces imports from China, Southeast Asia and India are emerging as new trade partners for the United States, especially India, which will grow its total trade with the United States by 48 percent in 2023. The United States is also shifting orders to other countries to further reduce dependence on the Chinese supply chain.

Recently, Tianfeng Securities released a research report saying that exports were expected to reach $298.46 billion in December, down 12.27 percent year-on-year. Imports amounted to $228.50 billion, down 7.29 percent year-on-year. The report said that the decline in foreign demand is likely to continue, and in January 2023, exports are expected to drop 20.48 percent and 16.16 percent year-on-year in January and February, respectively. Imports are expected to fall by 20.52 percent and 17.91 percent year-on-year.

Debt-Ridden and Struggling Real Estate Sector

Following Evergrande’s debt crisis, more than ten leading real estate companies in China experienced liquidity difficulties in 2022. According to incomplete statistics, about 70 real estate enterprises have applied to S&P, Moody’s, and Fitch to withdraw their ratings. Among them, several enterprises have canceled their cooperation with all three rating agencies.

In order to sell properties, the Chinese government and developers launched various kinds of fancy promotion methods. The city of Yulin in Guangxi launched a “buy an apartment and get a job” initiative where the city will give job priorities to new citizens who bought a property in the city and are not employed. Governments and developers across the country launched similar initiatives.

On June 30, 2022, the property owners of Evergrande Century in Jingdezhen, Jiangxi Province, were the first to announce they were ceasing mortgage payments. They refused to pay the mortgage of an unfinished building as a way of protest. Immediately afterward, the property owners of many projects in the country with incomplete and delayed home completions collectively announced the halting of mortgage payments. The trend swept across China, with at least 344 projects involving 132 developers’ mortgages not being paid by the end of the year. The CCP authorities were forced to launch various bailout policies to protect the real estate market and even allowed and encouraged listed real estate companies to refinance in case the bailout failed.

According to a report released by Kruger Property Research, the top 100 largest real estate companies in China reported new property sales of 677.51 billion yuan (approximately $98.2 billion) in December 2022, down 30.8 percent year-on-year, compared with a 25.5 percent drop in November. In terms of cumulative results, the top 100 real estate companies achieved sales of 6,462.22 billion yuan (approximately $936.56 billion) from January to December, down 41.6 percent year-on-year.

In addition, China’s real estate companies will enter a peak debt repayment period from 2022 to 2025, with at least $292 billion of debt maturing in China’s real estate industry by the end of 2023, resulting in a surge in pressure on real estate companies to pay off their debts.

China Banking Industry’s Credit Crisis

On Jan. 1, 2022, the new regulations on asset management were officially implemented. The regulations were designed to break “rigid payment.” According to the “rule” of rigid payment, financial institutions, such as bond issuers, will pay investors for initial investment and a certain amount of returns they promised explicitly or implicitly beforehand, regardless of the actual performance of the specific financial product. The “zero risk” promised by the bank’s wealth management products became a thing of the past. The return on wealth management depends entirely on the actual investment results, and the originally expected rate of return no longer exists.

In March, 3,600 bank wealth management products had negative returns, accounting for more than 13 percent. This year has become the first year of negative returns for bank financial management. Various factors have led to two rounds of bank financial products having negative returns. Promised capital preservation in bank financial products has become a thing of the past in China. So-called “stable investment” is no longer “stable.”

On April 18, several village banks in Henan Province experienced a cash crisis, customers were unable to withdraw their money, and the banks shut down their online withdrawal and transfer functions without warning. More than 400,000 customers suffered serious financial losses, the amount involved reached 40 billion yuan (Approx. $5.94 billion).

On Sept. 2,  2022, the Bank of Nanjing was again in trouble for acting as the clearing agent for six village banks in Henan and Anhui. A group of customers gathered outside the Bank of Nanjing’s Hangzhou branch to protest for their rights, sparking rumors that the Bank of Nanjing was also experiencing a crisis like the village banks.

Subsequently, several provinces such as Beijing, Guangdong, Shandong, and Hainan have seen bank cards that can only be used for deposits but not withdrawals. Some customers even had their cards frozen. Some analysts believe that many banks are facing a cash crunch and are using the “card malfunction” as a means of restricting withdrawals to solve the problem of insufficient cash flow.

In addition, the size of non-performing assets in the banking sector increased significantly, and the merger and restructuring of small and medium-sized banks became a common phenomenon in the banking industry. In the first half of 2022, small and medium-sized banks in China disposed of a total of 670 billion yuan ($98.97 billion) in non-performing assets, and 34 small and medium-sized banks merged and restructured.

According to the “China Banking Economic and Financial Outlook Report (2023),” at the end of the third quarter of 2022, the balance of non-performing loans of commercial banks was 3 trillion yuan, an increase of 5.6 percent year-on-year. Among them, the growth rate of the non-performing loan balance of large commercial banks and joint-stock commercial banks was 4.37 percent and 3.16 percent, respectively. The growth rate of the non-performing loan balance of city commercial banks and private banks was 16.26 percent and 40.46 percent, respectively.

CCP’s Chip-Building Dream Shattered

In August 2022, President Joe Biden officially signed the CHIPS and Science Act 2022, which prohibits all subsidized chip companies from expanding their production capacity in China; the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) announced that four new technologies, including chip design software and fourth-generation semiconductor materials, were included in export controls.

During the same period, the Xi Jinping regime suddenly started an “anti-corruption storm against chips.” Ding Wenwu, Lu Jun, Gao Songtao, and Yang Zhengfan, the managers of the National Chip Fund of the CCP, were arrested one after another. Diao Shijing, the former director of the CCP’s Department of Electronics of the Ministry of Industry and Information Technology and the former president of Ziguang Group, was arrested as a part of the investigation.

In October 2022, the United States issued a semiconductor and equipment export control order against the Chinese Communist regime, restricting its ability to obtain certain regulated U.S. semiconductor products and technologies. It was the largest chip export control ban to date on the CCP, which prohibits the export of advanced chips and process equipment below 14 nanometers, AI and supercomputing chips, and NAND Flash memory above 128 layers to China unless permission is obtained from the U.S. government.

In addition, the control order also prohibits U.S. technical personnel from developing and producing advanced chips in China. The top executives of Chinese companies, such as SMIC and Yangtze Memory Technologies Co., have left their jobs. Following the ban, Chinese companies imported $2.3 billion of semiconductor manufacturing machinery in November, down more than 40 percent from a year earlier to the lowest level since May 2020.

In November, the United States successfully persuaded Japan and the Netherlands to establish new export controls to ban the export of advanced chip production equipment to the CCP.

The CCP spent 9.5 trillion yuan (about $1.4 trillion ) to support its semiconductor industry. However, the chip industry in China is plagued with a lack of technology and experience. Many chip-manufacturing factories are currently abandoned as a result.

CCP’s Extreme COVID-19 Policy Changes

The CCP’s pandemic policies have been extreme and unpredictable. On April 1, 2022, the CCP authorities announced a total lockdown of Shanghai, China’s largest city, with more than 40 million people living in the metropolitan area.

In 2021, Shanghai contributed to 3.8 percent of China’s GDP, ranking first among all cities. After more than two months of lockdown, Shanghai’s GDP fell 13.7 percent year-on-year in the second quarter, ranking first in the bottom half of the country.

At the end of October, the number of employees infected with COVID-19 increased dramatically at the Foxconn factory in Zhengzhou, Henan Province, due to a closed production environment. In late November 2022, the factory’s failure to honor its contract and forcing employees to live with Covid-infected workers led to a massive protest by newly recruited employees. The protesters clashed with riot police.

The Foxconn factory in Zhengzhou undertakes 50 percent of the global production of iPhones and is the largest global manufacturing base for iPhones, bringing huge employment and tax revenue to Zhengzhou and accounting for 60 percent of exports from Henan Province.

The Shanghai lockdown and Foxconn crisis have prompted the three Apple supply chain companies, namely, Hon Hai Precision, Pegatron, and Compal Electronics, to accelerate their relocation to India and Vietnam and also accelerated Apple’s deployment of iPhone production lines overseas.

On Dec. 7, the CCP suddenly issued the “New Ten Rules” for Covid pandemic prevention, abruptly abandoning its zero-Covid policy without warning, preparation, or planning. The number of Covid-infected people across the country exploded, impacting the global supply chain again.

Several automakers are also accelerating their supply chain restructuring. Mazda is shifting production of some parts made in China to its home market in Japan; Ford and GM are shifting parts production to U.S. plants; and Mercedes is considering shifting its parts procurement to suppliers in Europe, the United States, or Mexico.

Kristalina Georgieva, the managing director of the International Monetary Fund (IMF), said in an interview with CBS on Jan. 1, 2023, that the Chinese government’s process of relaxing COVID-19 rules was chaotic and that the pandemic could further hit China’s economy this year and drag down regional and global growth.

Despite frequent gestures from the CCP to bail out the property market and encourage private enterprises in late 2022 in an attempt to salvage China’s economic downturn, the three pillars supporting China’s economic growth have all been hit hard, and the international economic environment has undergone many significant changes, making China’s economic situation in 2023 even more challenging.