China’s economy is floundering.
“Provinces have cut civil servant pay, including for school teachers, thereby denting morale,” Bloomberg reported on Oct. 31. “The poorest regions are lobbying for a central government bailout, with veiled threats of bond defaults.”
Zhongzhi is missing debt payments, which will put other financial institutions in trouble. The defaults could cascade, as did the Lehman Brothers bankruptcy in 2008.
On Nov. 23, The Wall Street Journal mentioned fears of a “Lehman moment” in China.
“Missed payments by the trust business, Zhongrong International Trust, have piled up,” the Journal wrote. “Since August, at least 16 publicly listed companies in mainland China have said in stock-exchange filings that they didn’t receive interest or principal payments on products managed by Zhongrong Trust.”
At the end of 2022, Zhongrong had $108 billion in assets under management. Its investors surely want their money back just about now.
To simplify for purposes of explanation, in the 2010s, investors got excited by the runaway 10 percent GDP growth rates in China. They must have thought the debt-fueled growth would go on forever. But 10 percent growth never does, and debt must be repaid.
The regime in Beijing got excited, too, and thought communist dictatorship, particularly its own communist dictatorship, was the answer to all of the world’s economic problems. CCP leader Xi Jinping doubled down on building a military and outgoing economic strategy (the Belt and Road Initiative) to force, buy, and “enlighten” the world, starting with Hong Kong and Taiwan.
The glory days wouldn’t last.
The CCP’s “three red lines” caused a payment crisis for some large financial institutions, including Zhongrong, the first big one on its way to a fall. When the banks stopped lending to distressed developers, developers stopped building, their revenue ceased, and they couldn’t pay back their old loans. International and consumer confidence in the entire real estate sector, and by extension, China’s economy, swooned, and not in a good way.
“Even before the country’s COVID shutdowns, growth had begun stalling amid demographic headwinds, an emerging slowdown in the real estate sector, and a re-emergence of state-led economic policymaking,” Mr. Fang wrote. “The centralization of power has fed into a worsening relationship with China’s Western partners that further threatens the country’s growth prospects.”
“The Chinese government’s recent tendency to rapidly engineer policy U-turns hurts confidence,” Mr. Fang wrote. “This possibility makes it more difficult for Chinese businesses to attract foreign investment and has become a key barrier to the international-market expansion of Chinese firms like TikTok and Huawei.”
China’s problem is the CCP, which destroyed not only the momentum of its economy and property developers but also international businesses trying to invest in the country, the entire financial industry of Hong Kong, and the Uyghurs, Tibetans, and Falun Gong practitioners who might have helped China if they were allowed.
Instead, the CCP attempted to assimilate them with genocidal policies that have rightly drawn the opprobrium of the international community and struck fear into international businesses that don’t want to risk hits to their reputations. They’re turning away from China and looking elsewhere, such as to India, Mexico, and Vietnam.
Taiwan is a huge investor in China. There’s no clearer example of the CCP being both economically and politically disastrous for China, all born of a hubris that its communist system is somehow superior to market democratic systems in places such as the United States, Europe, Japan, South Korea, and Taiwan, all of which have far higher GDP per capita.
Investors who thought China was doing great in the 2010s, when easy money flowed, are now thinking twice and trying to get out. The outflow of money and people is generally depressing China’s real estate market and economy, making things even worse for China’s future.
