China has long been the engine of global growth.
But in recent weeks, his economic slowdown it has alarmed international leaders and investors who no longer count on it to be a bulwark against weakness elsewhere. In fact, for the first time in decades, the world’s second largest economy is itself the problem.
Hong Kong’s Hang Seng
(HSI) The index slid into a bear market on Friday, having fallen more than 20% from its recent high in January. Last week, the Chinese yuan fell to its lowest level in 16 years, prompting the central bank to make its biggest defense of the currency on record by setting a much higher rate for the dollar than estimated market value.
The problem is that, after a rapid increase in activity earlier this year following the lifting of the Covid lockdowns, growth is stalling. Consumer prices are falling, the housing crisis is deepening and exports are falling. Youth unemployment has gotten so bad that the government has stopped publishing the data.
make the situation worse a major home builder and a leading investment company have stopped paying their investors in recent weeks, reigniting fears that the continued deterioration of the housing market could lead to increased risks to financial stability.
The lack of firm measures to stimulate domestic demand and fears of contagion have triggered a new round of growth downgrades, with several major investment banks cutting their forecasts for China’s economic growth to below 5%.
“We are lowering China’s real GDP growth forecast… as the housing recession has deepened, foreign demand has weakened further and political support has been lower than expected,” UBS analysts wrote in a statement. research note on Monday.
Researchers at Nomura, Morgan Stanley and Barclays had previously cut their forecasts.
That means China could significantly miss its official growth target of “around 5.5%,” which would be a shame for the Chinese leadership under President Xi Jinping.
It is a far cry from the global financial collapse of 2008, when China launched the world’s largest stimulus package and was the first major economy to emerge from the crisis. It is also a throwback to the early days of the pandemic, when China was the only major developed economy to avoid a recession. So what went wrong?
China’s economy has been stagnant since April, when the momentum of a strong start after a year it vanished. But concerns have intensified this month after payment defaults by Country Garden, once the country’s biggest developer by property sales, and Zhongrong Trust, a major trust company.
Reports that Country Garden was missing interest payments on two US dollar bonds scared investors and it revived memories of Evergrande, whose 2021 debt defaults ushered in the housing crisis.
While evergrande still in the process of debt restructuring, the problems in Country Garden raised new concerns about the Chinese economy.
Beijing has implemented a series of support measures to revive the real estate market. But even the strongest players are now teetering on the brink of default, underscoring the challenges Beijing faces in containing the crisis.
Meanwhile, debt defaults by property developers appear to have spilled over into the country’s $2.9 trillion mutual fund industry.
Zhongrong Trust, which managed $87 billion worth of funds for corporate clients and wealthy individuals, has been unable to pay for a series of investment products to at least four companies, worth about $19 million, according to statements from the company earlier this month.
Angry protesters even recently protested outside the trust company’s office, demanding payments on high-performance products, according to videos posted on Chinese social media seen by CNN.
“Further losses in the real estate sector risk turning into broader financial instability,” said Julian Evans-Pritchard, head of China economics at Capital Economics.
“With domestic funds increasingly fleeing to the safety of government bonds and bank deposits, more non-bank financial institutions could face liquidity problems,” he added.
Another big concern is local government debtwhich has spiked largely due to a sharp drop in land sales revenue due to the property slump, as well as the lingering impact of the cost of imposing pandemic lockdowns.
The severe fiscal stress seen locally not only poses huge risks for Chinese banks, but also reduces the government’s ability to boost growth and expand public services.
So far, Beijing has come up with a steady incremental trickle of measures to boost the economy, including interest rate cuts and other measures to help the property market and consumer businesses.
But it has refrained from doing any major move. Economists and analysts have told CNN that’s because China has borrowed too much to boost the economy like it did 15 years ago during the global financial crisis.
Back then, Chinese leaders implemented a four trillion yuan ($586 billion) fiscal package to minimize the impact of the global financial crisis. But the measures, which focused on government-led infrastructure projects, also led to unprecedented credit expansion and a massive increase in local government debt, from which the economy is still struggling to recover.
“While there is also a cyclical element to the current recession that warrants further stimulus, policymakers seem concerned that their traditional playbook will lead to further increases in debt levels that would come back to bite them in the future,” said. Evans-Pritchard.
On Sunday, Beijing policymakers reaffirmed that one of their top priorities was to contain systemic debt risks in local governments.
The People’s Bank of China, the financial regulator and the securities regulator have pledged to work together to meet this challenge, according to a declaration by the central bank.
In addition, China faces some long-term challenges, such as a demographic crisis and strained relations with key trading partners like the United States and Europe.
The country’s total fertility rate, the average number of babies a woman has willpower has had throughout his life, fell to a record low of 1.09 last year from 1.30 just two years earlier, according to a recent report by state-owned company Jiemian.com, citing a study by a unit of the National Health Commission.
That means China’s fertility rate is now even lower than Japan’s, a country long known for its aging society.
Earlier this year, China released data showing that its population started shrinking last year for the first time in six decades.
“China’s aging population presents significant challenges to its economic growth potential,” Moody’s Investors Service analysts said in a research report last week.
Decreased labor supply and increased health care and social spending could lead to a wider fiscal deficit and higher debt burden. A smaller labor force could also erode domestic savings, resulting in higher interest rates and decreased investment.
“The demand for housing will fall in the long term,” they added.
Demographics, along with slowing migration from rural to urban areas and geopolitical fracturing, are “structural in nature” and largely outside the control of politicians, Evans-Pritchard said.
“The big picture is that the growth trend has fallen substantially since the start of the pandemic and it looks like it will continue to decline in the medium term,” he said.