Chinese economic miracle, is it over? Covid- There are many negatives, including 19 detentions, a real estate crash, and a raid on business owners. According to the most recent projections, growth in 2022 might fall to 3%, well below Beijing’s aim of 5.5%. In sharp contrast to previous massive government rescue efforts, Chairman Xi Jinping and his team’s reaction has been impromptu and lackluster.
The effects of a hard landing in China would be catastrophic: For the monetary system and economy, there would be an emergency and decline. For the Communist Party in power, there would be a move from legitimacy centered on prosperity to handling based on repression.
The world markets, which are already in shock due to the conflict in Kyiv and the USA Govt Reserve’s rate hikes, would be a shock comparable to the Lehman moment of 2008.
Keep an eye out for the publisher who, in 2020, released a book only with the daring title China: This same Bubble Which Never Pops among the plethora of potential losers. I argued that, contrary to what detractors in America and on Stock Market would have you think, the nation’s monetary and financial systems are now more robust, and its policymakers are more clever.
That thesis has been put through a lot of stress testing in two years. Some may claim it was a failure. I provide a different viewpoint in the second version of my book. Yes, the air is exiting the China bubble more quickly. But it won’t pop, I’m afraid.
Let me start with the epidemic to explain why. The answer from his nation “once again showed the supremacy of the communist system with Chinese characteristics,” according to Xi in September 2020. Now that the rest of the globe is open for business after two years, While severe rolling lockdowns continue to be implemented in Chinese cities, Western opponents of China have fallen victim to a similar incident of arrogance.
Who’s correct? China’s reaction to the epidemic is undoubtedly not as stunning as it was. Lives have been spared, but productivity has been sacrificed, as the graph on the next page demonstrates. But remember the price other nations paid to regain normalcy: a million in the US and another million in Europe. Given its more significant population and constrained healthcare resources, China’s numbers might have easily been far higher if it had taken a similar course.
The strengths and vulnerabilities of each system, rather than the better crisis-management capabilities of unlimited democracies over state-controlled autocracies, may have been shown by Covid. There was a significant loss of life since the USA and Europe could not organize society to fight off the virus’s first waves. However, they were adaptable in their policy changes, and their cutting-edge pharmaceutical manufacturers provided extremely potent vaccinations, allowing an early break from Covid restrictions.
The authoritarian government in China has no problem limiting freedom to save lives. However, the duplicate suppression of dissent that allowed for harsh lockdowns made it difficult to change policy to reflect evolving conditions, leaving the nation locked with Covid Zero far beyond its expiration date.
The ultimate decision will be made once China leaves Covid Zero. If less lethal virus strains, improved vaccinations, and potent therapies allow Beijing to soften its position without suffering a significant loss of innocent life, He would be able to say that the years of periodic lockdowns were worth it. If not, and China experiences losses comparable to the US, his assertion that his system is better would be even more hollow.
Now let’s talk about real estate. Analysts have expressed concern for more than ten years that excessive borrowing and development have put China’s real estate market on an unsustainable track. According to estimates from Bloomberg Economics, the number of new houses is now around 25% more than what is required to fulfill demand over the next ten years. There are enough vacant residential spaces totaling over 1 billion square meters to accommodate all of Italy’s residents.
To their credit, officials made the wise decision to head off the issue by severing financial ties with overleveraged developers. As a result, there has been a sharp decline in building and real estate sales, a wave of builder defaults, and a mortgages strike that puts the repayment of 1000 billion yuan ($245 billion) in loans in jeopardy. The bears in China are hastily proclaiming victory, thrilled that their broken clock is now displaying the correct time.
Even still, the most probable consequence isn’t a repetition of the United States subprime crisis or the housing bubble burst in Japan in 1989. Exuberant booms and almost catastrophic crashes have characterized China’s real estate market throughout its history. Policymakers have adjusted the dials on home mortgage requirements, bond yields, and developer financing every time it seemed like the end was near to get back on course. They’re doing it again, but their objective is to slow the rate of decline rather than manufacture a new boom.
It is often emphasized that when all contributions—from construction materials to consumer electronics taken into account, real estate makes up around 30% of China’s GDP. Another way to say it is that property consumes 30% of labor and capital in an ineffective and unsustainable manner. The change will be difficult. But ultimately, directing more of those resources toward more worthwhile goals will be suitable for development rather than destructive.
What about the objective for “shared prosperity”? Every area of the economy has been impacted by Xi’s drive to narrow the wealth disparity in China. Huge penalties have been imposed on IT giants like Tencent Holdings Ltd. and Alibaba Group Holding Ltd. Platforms supporting the gig economy were compelled to pay employees more. Private tutoring businesses were coerced into becoming nonprofit organizations.
According to critics, their actions represent the pathologies of China’s one-party system, which involves paranoid autocrats acting against businesspeople who threaten their ability to control the country’s economy. They contend that policies that redistribute wealth from capital owners to family members and employees would ultimately stifle development and worsen living standards for all Chinese. The Stock exchange Golden Lion China Index, a leading indicator of the nation’s IT industry, has fallen about 70% from its April 2021 top, reflecting its pessimism.
There is an alternative perspective. China has a significant inequality issue. Beijing’s attempts to advance on vital objectives, including slowing the inevitable decline of labor by increasing reproduction, are being hampered by a wealth gap rivaling that in Africa and Latin America. According to a report published this year by the Chinese think tank, raising a kid to 18 costs to do effectively euros, or 6.9 times the average yearly salary, which is greater than most of Europe and the us. That is extremely expensive for many middle-class and low-income families.
It is possible—and potentially even more believable—to argue that Xi’s program for shared prosperity is based on sensible national policy, a Chinese dictatorial take on the progressive measures already being considered in both the US and Europe when seen through the lens of these urgent social concerns.
There is no denying the terrible state of China’s economy. In June, the dropout rate reached 19.9%, a record high. Even though China’s central bank has been decreasing interest rates, the benchmark CSI 300 equities index has fallen 23% for the year, more significant than the S&P 500. The yuan has lost value versus the dollar due to capital outflows.
The best-case scenario for the following years is a return to sustainable growth rather than a return to the boom times. The economy will continue to be hampered by demographics, debt, and overcapacity in real estate and elsewhere. The assault on the technology giants has dampened the home business climate while rising tensions between the US have put off foreign investors. GDP growth was around 6.5% per year in the six years before the Covid crisis; a victory would be an average GDP growth rate of 4.5% over the following five years.
Possibly worse? Sure. But keep in mind that wagers on China’s impending collapse are nothing new and, so far, haven’t been profitable. Early in the 1990s, market-opening reforms were revived after Tiananmen Square, thanks to Deng Xiaoping’s Southern Tour. Earlier in the new millennium, the Alliance System was joined, large banks were bailed out, and state-owned industries underwent reform. The supply-side restructuring and deleveraging agendas in the 2010s closed down aging industrial firms and decreased risk at the banks.
A proper understanding of China’s history shows a nation that constantly faces and overcomes crises rather than one that never does. I hope its policymakers will repeat this. The 1.4 billion individuals that makeup China, as well as the global economy as a whole, will suffer disastrous results if they don’t. Additionally, I may need to alter the book’s title.
