China’s economy was in deep trouble before it launched its viral pandemic upon the world. The trade war tariffs had diminished exports, and supply chains were moving out of China. But now the economic outlook appears weaker than it has in decades. This may be its worst quarter since the end of the Cultural Revolution in 1976, with an actual contraction in GDP in Q1.
Of course, despite the pandemic, Beijing has insisted that it will meet its economic growth goals for 2020. But that’s not realistic. It’s not even clear that China is actually over the pandemic. People can still be seen lining up at hospitals, and recent cellphone rolls on China Mobile show up to 21 million fewer users compared with three months ago near the start of the pandemic.
The Near Future Could Be Disastrous
Of course, no economy was prepared for a global pandemic, and all nations will continue to be severely challenged by the CCP (Chinese Communist Party) virus outbreak and its aftermath. But the inherent weakness in China’s economy makes it exceptionally vulnerable to both the pandemic downturn and the shift in global trade patterns away from China that’s underway. This dependency is made worse by cratering domestic demand.
What’s more, the CCP’s comprehensive oppression stifles efficiency and innovation in the economy. This will make it more difficult for the economy to adapt quickly to the challenges posed by this pandemic and the evolving global economy.
As a consequence, the pillars of China’s economy—consumer spending and real estate, as well as exports and direct foreign investment—are shaking, even crumbling, before Beijing’s eyes. The highly profitable pharmaceutical and medical supply industries, for example, will be repatriated to the United States as soon as possible.
Consumer Spending Plunges in 2020
The key pillar in China’s economy is domestic demand, which was 57.8 percent of the country’s economic growth in 2019. In the first quarter of 2019, consumer spending made up two thirds of China’s GDP growth.
But it’s not going to be the case going forward.
The epidemic lockdown and factory closures due to supply chain movement out of China will depress incomes. Consumer spending has been hit hard. It’s no wonder that 64.4 percent of Chinese are saying that they would be more “restrained” in spending in the long term, while another 12.6 percent said they would cut spending.
Combined, that’s 77 percent of consumers adopting more conservative spending patterns. These figures are likely to worsen with the expected higher food prices due to pork shortages from African swine fever (ASF).
Real Estate Prices and Profits Collapsing
Consumer spending and real estate development were the two biggest drivers of the economy for the past five years. Both are in hot water.
Consumer spending declines directly impact China’s real estate market. One of China’s biggest property development firms, Evergrande Group, announced its annual earnings to fall by 50 percent. That’s due to having to radically cut prices on residential properties to stimulate consumer purchases.
But Evergrande isn’t the only development giant scrambling for sales. Sunac China Holdings, Sinic Holdings, and Country Garden are also having to offer buyers special incentives, such as 30-day cancellation on purchases in order to entice consumers to make a deal.
The challenge is that presale revenues of residential apartments fuel the building of new developments. That fuel is diminishing quickly, as a rising number of developers are either in danger of defaulting on their U.S. dollar-denominated debts or are already insolvent.
In February, Bloomberg reported that among 30 property developers, sales dropped by 33 percent year-over-year.
That’s the steepest decline in six years.
For Exports, ‘Worst Is Yet to Come’
Net exports were only 11 percent of China’s economic growth in 2019, and a $7.1 billion trade deficit in January and February of this year may be just a short-term result of the pandemic. Still, it’s unlikely for exports to return to their prior robust levels.
Although Beijing hopes to ramp up exports to help juice the economy, falling global demand makes that doubtful. “The worst is yet to come for exports and supply chains,” said Larry Hu, chief China economist at Macquarie Capital.
A drop in the trade surplus suggests that trade will provide less support for economic growth and that the impact could be larger than thought. The worst will come later, as other countries’ demand for Chinese exports declines.
Foreign Investments Declining
In the first two months of 2020, foreign direct investment (FDI) into China fell 8.6 percent year-over-year, down to $19.26 billion. This dramatic fall is due almost entirely to the pandemic.
Although event driven, FDI may not return to their former levels for other reasons. If anything, the manufacturing shift away from China has sped up with the CCP virus outbreak. Those supply chain factories and jobs won’t be back in China anytime soon.
Furthermore, the world is becoming a lot less trusting of China, as its culpability in the pandemic becomes more well-known and understood. Beijing knows that it isn’t seen as favorably as it was in the pre-pandemic era, which explains the CCP’s desperate propaganda campaign to deflect blame.
A Reckoning at Hand
Understandably, Beijing’s response is to pump hundreds of billions of dollars in stimulus to the economy. From the Party’s perspective, there isn’t really another option. It can’t afford to relax its grip on the economy or its citizens.
But more stimulus may not be as effective as it’s been in the past, as falling prices reflect weak consumer demand that reflects a lack of confidence in Beijing. It may well be facing a future of 2 percent GDP growth or even less.
The pandemic has revealed the multiple weaknesses of China’s cannibal capitalist economy that can no longer be glossed over by fake statistics, hidden by massive stimulus, primed by unproductive real estate projects, or patched up by triangular debt, foreign investment, and technology theft.
The “China Miracle” is over. Beijing can either save the CCP or save the economy.
Now that reckoning begins.
The Epoch Times refers to the novel coronavirus, which causes the disease COVID-19, as the CCP virus because the Chinese Communist Party’s coverup and mismanagement allowed the virus to spread throughout China and create a global pandemic.
James Gorrie is a writer and speaker based in Southern California. He is the author of “The China Crisis.”
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.