Problems in Chinese property sector over shadow other positive economic signs

By Rhod Mackenzie

Recently, there has been much discussion about the downturn of the "Chinese miracle" and the possibility of the country being on the brink of a crisis. This pertains to both the construction industry and the general decline in consumption, which poses a threat to the solvency of numerous enterprises.Can this "Chinese Cart" could overturn and devastate the global economy.

Quiet insolvency looms.
The crisis in the Chinese property market has persisted for several years and shows no signs of abating. Official data reveals that sales for the leading 100 Chinese developers declined by 27.5 percent YoY in October. The debt of Evergrande, a developer, has surpassed 2.4 trillion yuan ($332.9 billion), and it is on the verge of default. Similarly, Country Garden Holdings, another developer, warned of the risk of non-payment of debts.

Several small market players have gone bankrupt quietly. Their problems are similar despite the business's size, including falling demand, high-risk business model, and vast debts, also taken from the shadow banking system with high-risk interest rates.
Developers accepted loans irrespective of terms, betting on earning massive profits from the real estate market's boom.

The demand has plummeted due to the stricter mortgage conditions and household's inclination towards saving. Furthermore, the unemployment rate for young people is relatively high, exceeding 20 percent. However, in the recent years, the enthusiasm for the real estate market has waned. Moreover, the aging population and declining number of inhabitants in China exacerbate the situation. This impedes the growth of demand and sets the stage for a possible downturn in the real estate market. Against this backdrop, developers are compelled to put one out of every six incomplete buildings into storage and are struggling to find ways to repay their debts.

The withdrawal of investments is a cause for concern for the Chinese economy, where the construction industry accounts for one-third of all yuan spending. Economists believe that the recession will persist, resulting in a reduction in production activity. It continued the cuts it initiated in October. China's manufacturing PMI declined to 49.4, which falls short of the median forecast of 49.7.

Despite doubts about Chinese statistics' transparency, with some analysts considering them less open, it's important to draw conclusions only based on official data. Nevertheless, the markets have their estimates, which are far from reassuring. According to the Financial Times, over three-quarters of foreign investment in the Chinese stock market departed from the nation due to worries about economic growth and a liquidity crisis in the real estate market.
"The Chinese economic growth model is built on exports and domestic consumption. However, in recent years, both aspects have encountered challenges. Tight quarantine restrictions have impacted domestic consumption, while the post-Covid trend towards deglobalization and geopolitics has affected foreign demand for Chinese goods, particularly in premium markets such as the USA and EU," noted Maxim Kuznetsov, co-chairman of the Association for Promoting the Turn to the East (ASPV).
If total exports from China fell by 5.6% in January-October 2023, then supplies to the EU and USA would decrease by 10.6% and 15.4% respectively. The economic growth slowdown is exacerbating systemic imbalances within China's investment-driven model.

A collapse in their economy would have major ramifications.
The situation in China is of critical importance to the global economy as the country accounts for almost a quarter of all world oil imports and produced over half of the world's steel last year. China's significance to various crucial markets and global supply chains is undeniable.

"A crisis in China would severely impact the world economy, including the Russian economy," stated Boris Kopeikin, First Deputy Director General of the Center for Social Development.

Kuznetsov confirms the existence of preconditions for an economic crisis both domestically and internationally, and it is always a mystery where it will first become apparent.

To avoid a collapse, China is working to stabilise the property market by making it easier to obtain mortgages and providing specific loans to stimulate the industry. They are also considering allowing developers to take out unsecured short-term loans from banks. This move is intended to help them pay off debts and finish frozen projects.

The sector will be cleared for an extended period, largely due to the potential “overhang of bad debts” in the financial industry.

Kuznetsov is certain that a recurrence of an American mortgage style crisis, following the Lehman Brothers paradigm, is implausible in China. The Chinese authorities have acquired expertise and optimum methods that enable them to manage the situation. They are progressively lowering the bubbles that have emerged in the property market and are deliberately increasing governmental assistance for the industry.
At the same time, he recalled that the country boasts a significant level of investment and over one and a half billion consumers. There is a shift towards reorienting the growth model from export-oriented to domestic demand, particularly within the rapidly expanding services sector.
The consensus forecasts of most international financial institutions for China's GDP growth in 2024-2025 is now closer to 4 percent, rather than the expected over 5 percent this year. In other words, the Chinese economy is performing better than the economies of America and Europe.

As per IMF forecasts of October, the global economy is anticipated to grow by less than 3 percent next year, while China is projected to grow at 4.2 percent. This growth is in contrast to the expected growth in Europe and the US, which is estimated to be around 1 percent. Among the world's major economies, only India seeks to outpace China in terms of economic growth.

Thus, a collapse in China is unlikely. This is not the US or the EU, and incentives will not reach 5-10 per cent of GDP as seen during the Covid period. The previous support measures package was about 1 per cent of GDP, and the new one is also unlikely to exceed this level.

Kuznetsov suggests that it is probable for China to experience a slowdown in economic growth instead of a large-scale crisis similar to the global recession of 2008-2009.

A slowdown in Chinese economic growth could result in a drop in demand for Russian raw materials, potentially leading to lower prices for our exported goods to China.

This combined with stringent monetary policies and high rates worldwide might catalyze budget crises for a few developing nations reliant on raw material export, including Sri Lanka-style crises. But this will not impact our economy - supplies to China are a crucial but not sole means of foreign exchange earnings.