Like the previous short read about China’s development of indigenous semiconductor technology alongside a few other commentators who reckon things aren’t as bad on the ground in China might suggest the China’s economic collapse narrative is exaggerated by western propaganda. Having said that, data reported by Chinese authorities themselves is worrying. Indeed, they even stopped reporting youth unemployment data which had begun to soar. Whilst that will make tracking the development in China that much more harder, we need to keep abreast given the implications for all of us and the rest of the global economy. Ian Bremmer, a political scientist and author, in this piece, confirms the economic woes and explains how we got here and what is the likely way forward.
First, he reckons China over ran its economic growth model:
“The basic story is that the tailwinds that turned China into the factory of the world and lifted a billion people out of poverty between 1980 and 2010 – including favorable demographics, large cost advantages, strong consumer demand from the US and Europe, hyper-globalization, and plenty of low-hanging-fruit technologies for China to copy or steal – ran out very early in China’s development. By the end of the 2000s, long before Chinese incomes had reached developed-country levels, exports and foreign direct investment had started to taper off, and with them so did the era of 10% growth.”
Then turned to real estate to hold up growth:
“In order to keep growth going, China had to borrow and invest ever more capital into assets with ever lower returns, leading to a decline in the private sector’s return on assets. At first, infrastructure investment was profitable because China had to make up for decades of underinvestment. But eventually, China built enough apartment buildings, bridges, and airports to meet all its needs. Additional investments after that point were malinvestments – think ghost cities, bridges to nowhere, airports without planes – generating less and less growth for every yuan borrowed and invested. The more China used this playbook, the less potent and more costly it became.
But real estate wasn’t just the principal engine of growth. It was also (and still is) the main financial asset and store of wealth for regular Chinese citizens, who – lacking access to well-developed stock and bond markets and believing that prices would keep going up forever – spent their life savings on overpriced investment properties and took on loans (collateralized by the properties in question) to afford them. Real estate now accounts for nearly two-thirds of China’s household wealth and about 40% of the collateral held by banks.”
Property sector has been the centre of economic and financial woes with ramifications on local government balance sheets as well. Most commentators agree that a fiscal stimulus is an obvious way out:
“The obvious thing Beijing could do to stimulate growth in the short term would be to give direct fiscal stimulus to consumers (especially the poor and unemployed, who have the highest propensity to spend). Consumer stimulus would also be a step in the right direction toward the kind of structural reform China needs to achieve more balanced and sustainable growth in the long term: shifting economic activity from investment to household consumption, which at 38% of China’s GDP is extremely low compared to the 60% global average and about 70% in the US.”
What’s stopping them:
“But Xi is ideologically suspicious of consumption, both as a policy lever and as a driver of so-called “high-quality development.” The concern is that stimulating consumption would either exacerbate the property/debt bubble or be ineffective as households use the money to repay debts or save rather than spend. More broadly, Xi fears that the redistribution of resources required to give households a larger share of the pie could generate social unrest and undermine his and the Chinese Communist Party’s political control. And if there’s one thing you should know about Xi, it’s that he prioritizes social stability and political control above all else – including economic growth.”
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