Commentary
Retail prices are falling, exports are down, the famously troubled real estate sector is getting worse, and youth unemployment is so high in China that the government has stopped publishing data.
The Chinese economy is riddled with debt and sinking to a low not seen in decades. On Aug. 16, the yuan hit a 16-year low of 7.2981 to the U.S. dollar. This prompted the central bank to sell off large quantities of U.S. dollars in an attempt to slow the yuan’s depreciation.
By Aug. 18, Hong Kong’s Hang Seng (HSI) Index was down 20 percent from its peak in January. Local governments are facing liquidity issues as debt through local government financing vehicles (LGFVs) stands at about $7.8 trillion. The debts are usually paid off through the sale of real estate, but that sector is floundering. If the central government does not intervene, several local governments may default.
China’s financial sector is starting to crack as the non-performing loan ratio rose from 1.9 percent in 2020 to 4.4 percent at the end of 2022. Chinese investment firm Zhongrong Trust, which manages $87 billion worth of funds for corporate clients and wealthy individuals, has missed payments to corporate investors. The company released a bizarre statement cautioning customers about fraudulent notifications they might receive from “criminals“ falsely claiming that the company had canceled some investment products.
Zhingrong is a part of one of China’s largest private conglomerates, Zhongzhi. Zhongzhi has $138 billion in funds under management. Their missed payment has sparked panic on Chinese social media. Investors are speculating whether the rest of the conglomerate is also facing financial difficulties. There is fear about a possible collapse of China’s investment-trust sector, which is worth $2.9 trillion. The financial sector’s heavy exposure to real estate could spark a chain of defaults and lost investments.
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For years, analysts have been calling China’s overinflated and debt-ridden real estate market a bubble. They have predicted dire consequences when it finally bursts. On Aug. 13, a major Chinese property development company, Country Garden, suspended trading of onshore bonds until a debt restructuring can be arranged.
In June 2022, Country Garden saw a profit of $265 million. Now, it is expecting losses of $6.24 billion to $7.63 billion this summer. Shortly after the news of the bond restructuring broke, the company’s shares hit a record low of 90 Hong Kong cents.
Country Garden may just be the tip of the iceberg. Bad news at Country Garden spooked investors across the entire property sector, causing the Hang Seng Mainland Property Index to fall 1.49 percent. Currently, it is estimated that the entire property sector has $390 billion in unpaid bills. Since mid-2021, when the real estate debt crisis began, the largest companies accounting for 40 percent of Chinese home sales have all experienced defaults. Many off-shore bonds of Chinese real estate developers are selling for pennies on the dollar while their share prices have lost 90 percent of their value. The People’s Bank of China has granted property developers a 12-month extension to repay loans due this year.
China’s real estate sector accounts for 30 to 40 percent of the country’s economy. However, the trouble in the financial industry is just one of many examples of how turbulence in the property sector extends to other industries. In the United States, the stock market is often used to gauge the economy’s overall health. That gauge is the real estate sector in China. With a total value of $62 trillion, China’s real estate sector is the largest repository of wealth in the country and the most common investment vehicle. So when the real estate sector falters, people become cautious about spending their money. And this caution is driving China’s current decline in consumption.
In addition to Chinese consumers buying fewer products, the rest of the world also demands fewer Chinese exports. Reduced demand means less factory activity and fewer jobs. Pessimism is rising, and fixed asset investment has declined since last year. When businesses and governments reduce their investments in long-term capital goods like buildings, machinery, and infrastructure, the job market will get tighter. Fewer new jobs will be created, and unemployment is expected to increase.
China is facing an aging crisis along with a shrinking workforce. And yet they had a 21.3 percent youth unemployment rate before Beijing began suppressing data. Rising unemployment suggests the Chinese economy is in great trouble with no recovery path in sight. The Chinese economy is unlikely to collapse, but some analysts expect growth to decline to as low as 2 percent by 2035. This will hinder Chinese leader Xi Jinping’s goal of surpassing the United States as the world’s greatest economic and military power by 2049. The Chinese dream for the future may just remain in the future forever.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
