We are used to talking about China’s economy as a giant that just grows and grows, eventually eventually overtaking the United States in terms of economic size.
It doesn’t seem like it right now.
In July, the Chinese government said that the gross domestic product (GDP) grew by only 0.4 percent in April-June compared to a year ago. China also admitted that its annual target of 5.5 percent economic growth will not be realized.
China has also been suspected of embellishing its economic figures. According to the Bank of Finland’s estimate, China’s economy did not grow at all in April-June, but shrank by about two percent.
Last week, China announced new economic figures, according to which the problems of the economy only increased during July.
There is no end in sight to the corona restrictions
Chief Economist of Nordea Finland Wind Birch says China’s economic outlook looks worse than it has in a long time. The main reason for the economic stagnation is clear.
– Corona. Why not get out of the corona restrictions? Birch asks.
China’s harsh corona measures are still catching entire cities and affecting all areas of the economy.
China has not used western mRNA vaccines that have significantly reduced corona mortality, and it has not yet developed its own similar ones.
China’s own vaccines have proven to be ineffective against the omikron variant of the coronavirus, so a zero-tolerance policy that is heavy on the economy has been the only way to keep the corona situation under control.
China’s corona policy is the president personified to Xi Jinpingwho is expected to continue as the country’s leader at the Communist Party’s caucus at the end of the year.
According to Koivu, the transformation of the coronavirus into a less lethal one could give Xi the opportunity to change his policy, but now the strict corona policy seems eternal in the eyes of the Chinese and consumer confidence in the economy has collapsed.
– People are scared and excited about when the next corona lockdowns will be. You don’t dare to travel or use the services. Households in particular do not dare to buy new apartments, says Koivu.
The crisis in China’s real estate sector is deepening
Along with the corona restrictions, the most difficult problem for the Chinese economy can be found in the real estate market, where a bubble that has been bubbling for a long time is now bursting.
In China, the country’s custom has been to buy a new apartment several years before building a house. It is estimated that more than 90 percent of the new properties have been sold before their completion.
The real estate sector’s share of China’s gross domestic product grew to more than a quarter, and real estate’s share of household wealth grew to more than 70 percent.
At the same time, the real estate sector became over-indebted, which forced the administration to intervene. For the past two years, developers have not been allowed to recklessly take on new debt.
Now the apartments are no longer for sale. No less than 30 percent fewer apartments have been sold this year than the year before. In addition, the housing loan portfolio has declined and housing prices have been falling for almost a year now.
– Cash flow from the sale of unfinished apartments is important for Chinese real estate companies. Now the trading volumes are really low. It means that real estate companies have run out of money. Many construction projects have had to be put on hold because there is no money to build, Koivu says.
People are already leaving their mortgages unpaid
Now those who buy a new apartment can no longer be sure that the apartments they buy will actually be completed. In more than a hundred cities, hundreds of thousands of mortgage debtors have started protests and will no longer agree to pay off their mortgages unless construction projects are restarted.
The protests have become relatively large in a country where you can get a note on the social credit rating for a payment default. The consequence may be, for example, the restriction of the right to travel or the denial of a child’s school place.
As housing values plunge, hundreds of millions of Chinese people have found that their prosperity was a fluke. The bursting of the housing price bubble also creates a problem for the country’s authoritarian ruling Communist Party, which has trusted the prosperous people to remain obedient to it.
China lowers interest rates when others raise them
China’s old cure for the economic cough has been strong central-led stimulus.
That’s what it’s trying to do now, too: China lowered its key funding rate last week to give the economy a boost. Yesterday, China announced that it will also lower the benchmark mortgage interest rate for the second time this year.
– There is practically no inflationary pressure in China. When the economic outlook is bad, it is natural that the economic policy is in the direction of recovery, says Koivu.
China’s inflation was 2.7 percent in July, which was below expectations. Core inflation, which bypasses food and energy price changes, was only 0.8 percent.
However, according to Koivu, lowering the benchmark interest rate does not necessarily help, because consumers and companies now prefer to save rather than take out a loan.
Without a strengthening of demand, the central bank risks falling into a liquidity trap. This refers to a situation where, as the interest rate approaches zero, lowering interest rates no longer helps to revive the economy.
Koivu also believes that the long-term goal of the Chinese leadership is to reduce the country’s indebtedness. Therefore, the announcement of large stimulus packages is unlikely.
– Rising debt levels are a huge problem for China. It will improve China’s long-term prospects if the debt can be reduced. A big question is also whether Chinese banks will join the recovery. Do they take the credit risk on their own balance sheet in this situation?
However, according to Koivu, the rise in unemployment might force the Chinese leadership to react with stronger stimulus measures.
According to figures reported by China, urban unemployment remains at a moderate 5.4 percent, but youth unemployment has risen to a record 20 percent. Koivu says more young people are graduating from universities than ever, but companies don’t dare to hire them because of the unstable economic outlook.
– This youth unemployment is one of the most vexing problems for the Chinese leadership, because it affects public confidence in every way.
China’s time as the engine of the world economy may be over
In the global economic forecast published by the International Monetary Fund IMF in July, the slowdown in China’s economic growth was predicted to contribute to a global recession.
Koivu also estimates that China’s economic problems are putting significant downward pressure on the global economy.
– China has been the biggest engine of growth in the world economy for a long time. In terms of world trade and industrial production, China is already becoming the pace-setting economy. The pace of China’s economic growth is reflected in all other countries.
China’s most recent weak economic readings immediately lowered the prices of raw materials, as China is the world’s largest importer of raw materials.
– Global inflationary pressure is falling especially because the prices of raw materials are reacting to China’s slowing growth rate. Certainly, the drop in oil prices in recent weeks is also related to the weakening of China’s growth prospects, says Koivu.
However, Koivu does not believe that the inflation plaguing Western countries will turn into a rapid decline thanks to China’s economic figures.
– In the United States, domestic wage price spirals are strong. I don’t think the Chinese economy will affect them very much. In Europe, on the other hand, the concern is with energy prices. In them, we know that the risks are more related to that direction to the east.
The slowdown of China’s economy most directly affects the poorer countries that produce raw materials.
– For example, many Latin American countries are large producers of raw materials, and their main trading partner is China. When the sales volumes or prices of raw materials fall, these countries are in trouble.
The tightened situation of great power politics is also now visible in the statistics.
– Yes, it is slowly starting to show that Western countries are afraid to invest in China. Until spring, record amounts of foreign investment flowed into China. Now the very latest readings have started a clear decline. From the capital flows, we can see that after the war of aggression started by Russia, the China risk is being thought about feverishly.
Koivu emphasizes that the direction of China’s economic thinking has changed, and China’s economic growth as a driver of the world economy can no longer be trusted as before.
– The prioritization of the economy has been left behind, when other values have come to the fore. The economy is regulated more, and its unpredictability has increased. I’m following this big picture break with quite a bit of concern.
You can discuss the topic until Wednesday, August 24 at 11 p.m.