Hong Kong
CNN
—
China has long been the engine of global growth.
But in recent weeks the economic slowdown has alarmed international leaders and investors who are no longer counting on the country 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) Index went into a bear market on Friday after falling more than 20% from its recent peak in January. Last week, the Chinese yuan fell to a 16-year low, prompting the central bank to stage its biggest defense of the currency on record, fixing a much higher exchange rate against the dollar than estimated market value.
The problem is that growth is faltering after a rapid surge in activity earlier in the year following the lifting of Covid lockdowns. Consumer prices are falling, the real estate crisis is worsening and exports are weakening. Youth unemployment has risen so much that the government has stopped publishing the data.
02:15 – Source: CNN
Lee: China’s economic downturn will not cause much damage to western economies
To make matters worse, a major homebuilder and a well-known investment company have missed payments to their investors in recent weeks, reigniting fears that the ongoing deterioration in the property market could lead to heightened risks to financial stability.
A lack of decisive action to stimulate domestic demand and fears of contagion have prompted a new round of growth downgrades, with several major investment banks slashing their forecasts for China’s economic growth to below 5%.
Ying Tang/NurPhoto/Getty Images
A skyline of Shanghai, China’s financial capital, taken on August 7
“We are downgrading China’s real GDP growth forecast… as the real estate slowdown has deepened, external demand has weakened further and policy support has been weaker than expected,” UBS analysts wrote in a research note on Monday.
Researchers from Nomura, Morgan Stanley and Barclays had previously revised their forecasts downwards.
That means China could fall well short of its official growth target of “around 5.5%,” embarrassing Chinese leaders under President Xi Jinping.
It’s a far cry from the global financial crisis of 2008, when China launched the world’s largest stimulus package and became the first major economy to emerge from the crisis. It’s also a reversal from the early days of the pandemic, when China was the only major developed economy to emerge from a recession. So what went wrong?
China’s economy has been in the doldrums since April, when momentum faltered after a strong start to the year. But concerns have increased this month after Country Garden, once the country’s largest real estate developer by property sales, and Zhongrong Trust, a top trust company, defaulted on payments.
News that Country Garden had missed interest on two US dollar bonds spooked investors and brought back memories of Evergrande, whose debt defaults in 2021 signaled the start of the housing crisis.
While Evergrande is still undergoing a debt restructuring, problems at Country Garden have sparked new concerns about the Chinese economy.
Beijing has taken a number of supportive measures to revitalize the real estate market. But even the stronger players are now on the brink of default, highlighting the challenges Beijing faces in containing the crisis.
Meanwhile, defaults by real estate developers appear to have spread to the country’s $2.9 trillion mutual fund industry as well.
Zhongrong Trust, which managed $87 billion in funds for corporate clients and high-net-worth individuals, failed to repay a series of investment products worth about $19 million to at least four companies, according to company statements earlier this month.
Angry protesters even recently protested outside the trust company’s office, demanding payouts for high-yield products, according to videos shared by CNN on Chinese social media.
“Further losses in the real estate sector threaten to translate into greater financial instability,” said Julian Evans-Pritchard, head of China economics at Capital Economics.
“As domestic funds increasingly seek the safety of government bonds and bank deposits, more non-bank financial institutions may face liquidity problems,” he added.
Another major concern is local government debt, which has skyrocketed largely due to a sharp drop in land sales revenue due to the real estate decline, as well as the ongoing impact of the cost of imposing pandemic lockdowns.
Severe fiscal stress at the local level not only poses major risks for Chinese banks, but also limits the government’s ability to boost growth and expand public services.
Beijing has so far announced a steady series of measures to stimulate the economy, including interest rate cuts and other measures to support the property market and consumer businesses.
But it has refrained from taking major steps. Economists and analysts told CNN that this was because China was too indebted to boost the economy like it did 15 years ago, during the global financial crisis.
At that time, Chinese leaders put together a 4 trillion yuan ($586 billion) tax package to mitigate the impact of the global financial crisis. But the measures, which have focused on government infrastructure projects, have also resulted in unprecedented credit expansion and a massive rise in local government debt, from which the economy is still struggling to recover.
“While there is also a cyclical element to the current downturn that justifies stronger stimulus measures, policymakers seem concerned that their traditional policy approach would result in further increases in debt levels that would plague them again in the future,” he said he Evans-Pritchard.
On Sunday, Beijing policymakers reiterated that curbing local government systemic debt risks is one of their top priorities.
According to a statement from the central bank, the People’s Bank of China, the Financial Regulator and the Securities Regulatory Authority have jointly pledged to work together to address this challenge.
In addition, China faces some long-term challenges such as a population crisis and strained relations with key trading partners such as the United States and Europe.
The country’s total fertility rate, the average number of children per woman will According to a recent report by state-owned company Jiemian.com, which is based on a study by a division of the National Health Commission, the lifetime value dropped from 1.30 just two years earlier to a record low of 1.09 last year.
That means China’s birthrate is now even lower than that of Japan, a country long known for its aging society.
Earlier this year, China released data showing the country’s population began shrinking last year for the first time in six decades.
“China’s aging population poses major challenges to its economic growth potential,” analysts at Moody’s Investors Service said in a research report last week.
The decline in labor supply and higher health and social spending could result in a larger budget deficit and debt burden. A smaller labor force could also erode domestic savings, leading to higher interest rates and falling investment.
“The demand for housing will fall in the long term,” they added.
Demographics, along with slowing rural-to-urban migration and geopolitical division, are “structural in nature” and largely out of the control of policymakers, Evans-Pritchard said.
“The overall picture is that trend growth has declined significantly since the start of the pandemic and is expected to decline even further in the medium term,” he said.
Comments are closed.