Four years after property developer China Evergrande defaulted on its sky-high debts and marked the beginning of China’s property crisis, the sector remains a cancer within its economy.
Data released by China’s National Bureau of Statistics on Monday shows its economy continues to weaken, with retail sales at their lowest since the pandemic and the country facing its first fall in investment since the late 1980s.
At the heart of its economic challenges – which saw a 2.6 per cent year-on-year decline in fixed-asset investment in the first 11 months of the year – is the seemingly endless implosion within China’s property market.
Prices and sales volumes are continuing to fall – sales have nearly halved since the property crisis gathered momentum in 2021 – and investment in property has plunged 15.9 per cent in the 11 months to the end of November.
From the moment China Evergrande, at one point the world’s most indebted property company with a debt load of more than $US300 billion (more than $400 billion at the time), began teetering in 2021, the collapse of the property market has increasingly infected key aspects of China’s domestic economy.
It has savaged household wealth which – given roughly 70 per cent of Chinese household wealth is tied up in property – has in turn damaged consumer confidence and spending.
Beijing’s traditional response to downturns – boosting investment in property and infrastructure – isn’t appropriate in the current circumstances.
It has undermined the finances of local governments, which relied on property sales for a significant proportion of their incomes, and their ability to invest in infrastructure and services.
It has destabilised the shadow banking sector, a conduit for financing property developments, in another blow to households which invested in its largely unregulated and unprotected investment vehicles and local governments that used them for off-balance-sheet funding.
With consumption weakened, China’s factories have developed significant over-capacity, which has led to price wars and a flood of cheap products into export markets that is unnerving China’s trading partners.
The $US1-trillion-plus trade surplus China will record this year, combined with the diversionary effects of Donald Trump’s tariffs on China’s exports to the US, is increasing protectionist sentiments elsewhere and threatening to throttle what has become China’s safety valve and economic lifeline from the property market-induced problems within its domestic economy.
And those problems persist.
The last of the “big three” Chinese developers still standing, China Vanke, is on the verge of defaulting on its debts. Vanke was, with Evergrande and Country Garden, one of the top three property sales generators at the peak of the country’s property development boom.
The state-backed developer’s plan to defer payments on its debts that were due on Monday for a year was rejected by its bondholders. It will hold a new meeting on Thursday to seek bond-holders’ approval for the rescheduling of the $US283 million payment.
The inability of authorities to quickly purge the zombie property companies and halt the continuing erosion of property values and household wealth has generated deflation and stagnation in China’s domestic economy.
Beijing’s traditional response to economic downturns – boosting investment in property and infrastructure – isn’t appropriate in the current circumstances, where over-investment has been a major contributing factor in the crisis.
External observers have called for increased social spending and other stimulus measures to boost domestic consumption but, apart from some modest steps, President Xi Jinping has rejected the advice. He has preferred to stick with his strategy of investing in, and subsidising, advanced manufacturing.
Some of those past efforts to stimulate demand via subsidies for trade-ins of appliances and other products showed up in the country’s lower-than-expected retail sales growth.
In the final quarter of last year, concerned about slowing growth, Beijing responded by rolling out the trade-in measures. With their effects fading as the year progressed, appliance sales, for instance, fell nearly 20 per cent in November.
At a central economic work conference last week, party officials promised to strengthen the domestic market to protect against external risks – presumably the risk that China’s major trading partners will start shutting down access to their markets. Boosting domestic demand and doing more to stabilise the property markets would be the obvious priorities.
The officials also want to stop the decline in investment while simultaneously continuing the crackdown on “redundant” investment and “involution,” or the vicious cycle of over-production, excessive competition and price-wars that have resulted in sales below production costs in some industries, notably the auto industry (where the regulators are about to crack down on below-cost pricing), and caused concerns in export markets that Chinese manufactured goods are being “dumped” in their countries.
Trump’s tariffs and their flow-on effects, by shifting China’s exports away from the US to Europe, South-East Asia, Africa and Latin America, are generating increasing resistance.
The European Union, fearing its manufacturing base will be wiped out, has threatened tariffs of its own. Mexico, falling into line with US demands, has slapped tariffs of up to 50 per cent on imports from China. Canada, Brazil, Turkey, India and others have tariffs on at least some products from China.
Protectionism is spreading and intensifying and represents a significant threat to the economic model to which China has pivoted to sustain growth in the face of its domestic weakness.
To avoid a deflationary spiral and insure against the risk to its export income, Beijing will eventually have to do something about shoring up domestic demand, probably by strengthening its social security net, expanding its services sector and putting a floor under its property market, even though Xi seems to believe stimulus is wasteful.
China will presumably achieve its target of 5 per cent GDP growth this year, largely thanks to its exports and the “rubberiness” of its calculations (it always hits its target, generating considerable cynicism outside China).
Beneath that headline number though, all is not well. As the year is coming to a close, the data is saying that the fissures within China’s domestic economy, and the pressure to respond to them and address the threats to the country’s exports, are growing.
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Stephen Bartholomeusz is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.Connect via email..png?w=390&resize=390,220&ssl=1 "Discover Amazon Business gift ideas for quick delivery and avoid the Christmas crowds")
