VSThe hina has reached a tipping point in its battle to contain what could be the biggest real estate crash the world has ever seen, experts warn, putting the country’s communist rulers and the global economy at risk.
As Western countries stand on the brink of a potentially ruinous recession over the coming year, China is also facing a meltdown thanks to the “total collapse” of ordinary citizens’ confidence in the once property market. flourishing, the continued ravages of Beijing’s draconian zero-zero. Covid strategy and an extreme heat wave which affects the supply of electricity and food.
Alarm is spreading in China that tough times are on the horizon, with Huawei chief executive Ren Zhengfei causing a stir this week when he warned that the chill of the economic downturn would be ‘felt by everyone’ over the next decade.
But just as it has become impossible for President Xi Jinping to reverse the massive lockdowns that have slowed economic activity, it also looks increasingly unlikely that he and his political bureau will reverse the crackdown on reckless lending on the real estate market which has led to a 40% drop in home sales this year.
China’s housing market has been the engine of growth for the past two decades and is now the largest asset class in the world, with a notional value of between $55bn (£47bn) and 60 billions of dollars, which is greater than the total capitalization of the American stock. market. Now developers are going bankrupt after being deprived of easy credit, prices are plummeting, landlords are refusing to pay mortgages on unfinished homes and the drop in properties sold and construction is crippling local governments that depend on land sales. to earn their living.
Gabriel Wildau, a China expert at global consultancy Teneo, said Beijing faces a crucial moment over whether to reverse the loan crackdown or double down on its attempts to “tame the beast” of lending activity. unproductive construction that resulted in the emergence of ghost towns and airports, as well as roads to nowhere.
“The government faces a difficult choice. But it’s like zero-Covid. They’ve gone so far that they can’t go back because then it looks like an error in judgment or an error in policy,” Wildau said.
“That’s where the rubber hits the road. They want more high-tech growth and they don’t want as much real estate, but what replaces that? There’s been a total collapse in confidence in the housing market. No industry can survive that.
Trying to reinvigorate the economy was at the center of a sweeping package of measures unveiled by Beijing last week, including 300bn yuan (£37bn) in new infrastructure spending and an extension of borrowing from local governments in ‘worth 500 billion yuan. Economists said the stimulus was expected and may not have much impact in an economy already awash with investment funding. What is needed, they say, is for Chinese households to have more cash on hand to rebalance the economy away from the tired old investment model. However, such policies are politically difficult as they threaten the established order of powerful party cadres, centralized state enterprises and local government panjandrums.
Wildau says Beijing has the money and the technocratic savvy to bail out the real estate sector, but it would be “very expensive”. So far, it appears that Xi, despite the chaos unleashed, is sticking to the plan to stamp out excesses and ensure “houses are made for living in” rather than speculation.
So far, China’s export industries have held up well, and despite trade wars and lockdowns, the country has actually increased its share of global manufacturing since the pandemic began. Even that, however, is under threat as global demand looks likely to fall off a cliff over the next 12 months in a feedback loop that means more danger for China.
As Ren’s comments on Huawei’s outlook pointed out, it’s not just China that faces uncertainty. Russia’s gas supply throttling and Western sanctions imposed following its invasion of Ukraine are fueling runaway inflation and dampening growth, threatening a dark winter for developed economies from the United States to the United States. Europe, and from Japan to South Korea. The worst cost-of-living crisis in nearly 50 years is slowly engulfing Western countries and it looks certain to lead to reduced demand for Chinese-made products as households need to focus on essentials such as food and fuel. On Friday, US Federal Reserve Chairman Jerome Powell shook stock markets by saying households and businesses would suffer as he indicated the central bank would continue to raise rates until inflation subsided. beaten.
David Llewellyn-Smith, chief strategist at Melbourne-based investment and asset management firm Nucelus Wealth, said falling external demand is the “next shoe to drop” for China, and will leave China in a perilous state.
“The private sector is hammered by Omicron, the external sector hammered by global weakness and the public sector is doing what it can to pick up the slack, but it faces various fiscal policy inhibitions. It’s a very toxic combo for China. Very difficult to manage,” he says.
“A Chinese recession is absolutely within the scope of next year. This is going to have incredible implications for global markets of all kinds.
It’s unclear exactly how the world feels about the cold Ren warned about, but it adds an unknown factor to an already dangerous mix of problems, says Roland Rajah, chief economist at the Lowy Institute, a think tank in Australia. . These include: increasing geopolitical volatility; fragile supply chains; political dysfunction in the United States; digital disturbance; and the accelerated effects of climate change. The challenges have even prompted French President Emmanuel Macron to join in the gloomy forecasts, saying that we are witnessing the “end of plenty”.
Back in the global financial crisis of 2008-09, China stepped up to the rescue of the global economy with a 4 billion yuan stimulus package. But with Beijing disassociating itself from the Western-led world order and debt-led growth in disfavour, another Chinese rescue mission seems highly unlikely. Instead, China faces Japanese-style “lost decades” as it tries to absorb billions of dollars in failed home loans.
“In the short term, the Chinese economy is hammered,” Rajah said. “It remains to be seen what the consequences might be in the medium and long term. But China also faces very significant longer-term headwinds from declining and aging populations, creeping statism and its increasingly difficult external relations.
And as China reaches its tipping point in its housing crisis, the global economy itself is also at a crossroads. “The global economy appears to be at a turning point,” Rajah says, “although it is also still in a state of flux where things could still go in a number of directions. People need to be prepared for a world much more uncertain, but we must also expect much more from our politicians and decision-makers, because the need for sound policy is only growing.”