The 21st century has been one of triumphs for the CCP.
From the 2008 financial crisis to the failure of COVID-19 containment, when US and European governments mishandled one disaster after another, even advocates of liberal democracy were skeptical of Chinese policymaking. They looked with envy at the apparent ease with which they navigated the same difficult waters.
But cracks in China’s governance model are beginning to emerge as China’s real estate sector deals with the effects of a recession in the property market and its zero-coronavirus policy fails in the face of a rapidly spreading new variant.
“There is a certain envy in the West over the prowess of China’s policymakers, but at this point the emperor wears nothing,” said Jeremy Mark, senior fellow and expert at the Atlantic Council. No,” he said. About the Asian economy.
Chinese President Xi Jinping looks set to win an unprecedented third five-year term when the Communist Party of China holds its 20th National Congress starting Oct. 16. world class power.
The end of China’s miracle growth
The importance of the Chinese economy to global economic growth became apparent in the years following the 2008 financial crisis. At this time, the US and European economies were strained under the weight of a hard-hit financial sector, while falling property prices and rising unemployment sapped consumer demand. .
The Chinese economy has not only been kept safe from financial spillovers, it has grown at a pace of nearly 10% annually from 2008 to 2011, prompting local governments to fund a new wave of large-scale infrastructure development. It had borrowed so much to do so that it had barely lost momentum.
Despite the decline in demand for Chinese goods in the West after the financial crisis, its economy thrived on the strength of a $575 billion fiscal stimulus package, equivalent to 13% of China’s GDP at the time. did. Easy financing for the real estate sector.
The stimulus package and subsequent policies built on the successes of the past three decades, when the government was able to drive double-digit economic growth through much-needed infrastructure investment. It also set the stage for his next decade, in which China’s economy will overtake the West and bring most of its growth to the global economy.
But these policies also masked serious problems. China had run out of ways to productively invest in roads, bridges and other infrastructure. Michael Pettis, a professor of finance at Peking University in Beijing, argues that this reality has created fundamental problems for Chinese policymakers that have yet to be resolved.
In a recent essay for the Carnegie Endowment for International Peace, Pettis wrote that after China “closed the gap between previous investments and those that the economy can productively absorb, … China will dramatically reduce the proportion of production it reinvests. should have been lowered to
But realigning the Chinese economy from one driven by investment to one dominated by domestic consumer spending faced political opposition, as vested interests in maintaining the current model hampered necessary reforms. .
“Political priorities are important in understanding the decisions of the Communist Party of China,” said Marks of the Atlantic Council. “Politics has taken precedence over other considerations in making economic policy decisions.”
slow debt crisis
Property bubbles are commonplace in economic history, and the bubble that formed in China’s property sector doesn’t look all that different from the bubbles that formed in the US and Europe in the 2000s.
In the U.S., homebuyers and builders enjoyed easy credit for the supposedly safe mortgage-backed securities provided by investor demand, and eventually rising home prices sparked a flurry of speculation that led to a bubble. We raised their prices even further until they collapsed.
Pettis said China provided easy credit to the real estate sector as the government sought to spur economic activity to meet unsustainably high GDP growth targets.
Adding to this story is that a Chinese developer will pre-sell homes that have not yet been built and use the money to buy more land rather than completing the promised homes. It’s a widespread practice.
“As real estate prices [in China] The rapid rise in prices has benefited companies that have taken the most risks by acquiring as much real estate as possible to anticipate future needs, he added.
Just as the US real estate market became dominated by speculators in the 2000s, so has China in recent years.
bubble burst
Chinese officials have long identified the property bubble and rising debt that fueled inflation as issues requiring serious attention.
In 2020, Beijing introduced new regulations that significantly restrict access to financing for the property development sector. This has prevented developers from borrowing to hide their cash shortfalls, and some have prevented homebuyers from completing projects they have already paid for.
Real estate developers like China Evergrande Group EGRNF,
China has struggled to deliver on promises to buyers and lenders over the past year, and stress in the property sector has hit speculators hard, with Chinese property prices falling for the 11th straight month in August. .
In an interview with MarketWatch, Brad Setser, a former senior adviser to the Office of the U.S. Trade Representative and fellow of the Council on Foreign Relations, said China’s real estate crisis was unlikely to pose a risk to the financial system. The Chinese government has shown a willingness to recapitalize banks in the past.
But given how important property development is to the Chinese economy, the bursting of the property bubble could prove to be a serious headwind for the Chinese economy even without a financial crisis.
“Real estate investment has been a much larger share of the Chinese economy than the US context,” Setser said. “It’s as if the entire economy is part of Nevada and Arizona and the states that were booming and under construction before our crisis.”
clean up the mess
The challenge facing Chinese policymakers is to somehow stem the cycle of falling property prices and sales, stabilize property developers, and complete the homes they promise to build.
Bloomberg Economics chief economist Tom Orlik estimates that the mortgage value attached to China’s unfinished properties will reach about $230 billion, or 1.4% of China’s GDP. If housing continues to be completed at the current pace, that amount will rise to $632 billion in 2024, or a whopping 4% of his GDP.
More Chinese people are boycotting mortgage payments on unfinished homes that developers have stopped building, said Houze Song, who heads research on the Chinese economy at MacroPolo think tank.
In an interview with MarketWatch, Song said that despite evidence that the government is taking the protests seriously, the Chinese government is working to stop the spread of information about the boycott in traditional and social media. He said it was difficult to know how widespread these protests were.
Beijing recently announced $29 billion in loans to troubled developers, but Song warned that “that size probably isn’t enough to solve the problem.”
The administration is in a difficult position, officials say, as they want to stabilize the real estate sector without sending the message that if private operators take too many risks, they will be bailed out by the government. Sung added.
That means governments are likely to roll out support slowly, trying to burden property companies and local governments with as much of the burden as possible.
The current stimulus package “would be enough to hodge-podge,” Song said, but uncertainty and worsening property problems will continue to weigh on consumer and business confidence and economic growth.
zero covid
Another headwind for China is its zero-corona policy, which involves gradual lockdowns of major cities to rid the country of the virus completely.
“There will be no housing market stability without mitigating zero Covid,” Carl Weinberg, chief economist at High Frequency Economics and a veteran China watcher, told MarketWatch.
This policy can be defended on moral grounds, especially when compared to the United States. In the United States, her COVID deaths of over 1 million contributed to her nearly unprecedented three-year drop in life expectancy.
However, while betraying the Communist Party’s authoritarian tendencies at a time when events in Hong Kong and Xinxiang have tarnished the CCP’s international reputation, China’s vaccine production and deployment has been less successful in the West. Clearly not.
Recent polls by Pew and the Eurasia Group show that while a growing proportion of the world’s population holds a negative view of China, countries from India to Nigeria to Brazil are poised to become major superpowers. He said he preferred the US over China for the role.
But China’s biggest decision lies ahead. Weinberg said the conflict between the West and China over Taiwan’s fate will dictate perceptions of China’s economic and political strength for decades to come.
“If Taiwan’s repatriation is successful, it will be able to dominate the global chip market and have a bigger voice on the international stage.”The stakes are really high.”