June 4, 2023

CExperts have warned that China’s fight to contain what could be the world’s largest ever real estate collapse has reached an irreversible point, putting the country’s Communist Party leadership and the global economy at risk.

With the West on the brink of a potentially devastating recession in the coming year, China is also facing a recession as ordinary people’s confidence in their once-booming property market “completely collapses” and Beijing’s draconian zero-interest-rate policy continues to ravage. Covid strategies and extreme heatwaves affecting electricity and food supplies.

In China, where warnings of impending hard times are spreading, Huawei CEO Ren Zhengfei caused a stir this week when he warned that the chill from the recession over the next decade will be “everyone knows.”

In March, President Xi Jinping arrived in Beijing to attend the opening ceremony of the Chinese People's Political Consultative Conference.
In March, President Xi Jinping arrived in Beijing to attend the opening ceremony of the Chinese People’s Political Consultative Conference. Photo: Carlos Garcia Rollins/Reuters

But just as it has become impossible for President Xi Jinping to reverse the massive lockdowns that have hampered economic activity, it seems increasingly unlikely that he and his Politburo will reverse the blow to reckless lending in the housing market, which has led to a drop in home sales this year. 40%.

China’s property market, which has driven growth over the past two decades, is now the world’s largest asset class, with a nominal value of between $5.5bn (£4.7bn) and $6bn, surpassing the total market capitalisation of US equities. Now that developers are bankrupt after being stripped of easy credit, prices are falling, homeowners are refusing to pay mortgages on unfinished homes, and a slump in property sales and construction is undermining local governments that rely on land sales for revenue.

A woman rides a motorcycle next to a construction site in Beijing this month.
A woman rides a motorcycle next to a construction site in Beijing this month. Photography: Wu Hao/EPA

Gabriel Wildau, a China expert at global consultancy Teneo, said Beijing faces a critical moment between reversing the crackdown on loans or redoubled efforts to “tame” ghost towns and airports and a path to nowhere path of.

“The government faces tough choices. But it’s like zero coronavirus. They’ve come so far and they can’t look back because it looks like a miscalculation or a policy error,” Verdau said.

“This is where the rubber hits the road. They want more high-tech growth, they don’t want as much real estate, but what can replace that? Confidence in the real estate market has completely collapsed. No industry is immune.”

Attempts to revive the economy have been the focus of a package of measures announced by Beijing over the past week, including 300 billion yuan (£37 billion) in new infrastructure spending and 500 billion yuan in loans to local governments. Economists say the stimulus is expected and likely won’t have much of an impact on an economy already flooded with investment money. What Chinese households need, they say, is more cash on hand to rebalance the economy and move away from stale old investment models. However, these policies are politically difficult because they threaten the established order of powerful party cadres, centralized state-owned enterprises and the curse of local governments.

An unfinished skyscraper in Tianjin, China.
An unfinished skyscraper in Tianjin, China. Photo: Anadolu Agency/Getty Images

Wildau said Beijing had the money and technical experts to bail out the real estate industry, but it would be “very expensive.” So far, despite the chaos, Mr. Xi appears to be sticking with plans to stamp out excesses and ensure “houses are for living” rather than speculation.

China’s export industry has performed well so far, and despite the trade war and blockade, the country has actually Increase its share in world manufacturing since the beginning of the pandemic. Even so, however, there are risks, as over the next 12 months it seems likely that demand around the world could fall off a cliff in a feedback loop that creates more danger for China.

Vehicles awaiting shipment at Yantai Port, Shandong.
Vehicles awaiting shipment at Yantai Port, Shandong. Photo: VCG/Getty Images

As Ren Zhengfei’s comments on Huawei’s prospects underscore, it’s not just China that faces uncertainty. Russian restrictions on gas supplies and Western sanctions over its invasion of Ukraine are fueling runaway inflation and stagnant growth, threatening a cold winter for advanced economies from the U.S. to Europe and from Japan to South Korea. The worst cost-of-living crisis in nearly 50 years is slowly sweeping across the West, which seems certain to lead to less demand for Chinese-made goods as households have to focus on necessities like food and fuel. Federal Reserve Chairman Jerome Powell stunned stocks on Friday, saying households and businesses would suffer as he said the central bank would keep raising interest rates until inflation was suppressed.

David Llewellyn-Smith, chief strategist at Melbourne-based investment and asset manager Nucelus Wealth, said a drop in external demand was China’s “next shoe” and would put China in peril.

“The private sector has been hit by Omicron, the external sector has been hit by global weakness, the public sector is doing what it can to make up the shortfall, but it faces all kinds of constraints on fiscal policy. It’s a very toxic mix for China. Very It’s hard to manage,” he said.

“A recession in China is definitely in the framework of next year. It’s going to have an incredible impact on various global markets.”

A child wearing a mask runs through an art installation in a mall in Beijing.
A child wearing a mask runs through an art installation in a mall in Beijing. Photo: Ng Han Guan/AP

Roland Rajah, chief economist at the Lowy Institute, an Australian think tank, said it was unclear how the world felt about the chill from Ren Zhengfei’s warning, but it added an unknown to an already dangerous mix of problems factor. These include: rising geopolitical instability; fragile supply chains; political failure in the United States; digital disruption; and the accelerating impact of climate change. The challenges even prompted French President Emmanuel Macron to join in a gloomy forecast, saying we were seeing the “end of abundance”.

Back in the 2008-09 global financial crisis, China rescued the world economy with a 4 trillion RMB stimulus package. But as Beijing is decoupling from the Western-dominated world order and debt-driven growth falls out of favor, another Chinese rescue mission seems unlikely. Instead, China faces a Japan-style “lost decades” as it tries to absorb billions of dollars in bad real estate loans.

“In the short term, the Chinese economy is taking a huge hit,” Raja said. “It remains to be seen what the mid- and long-term consequences might be. But China also faces very significant long-term headwinds such as a declining and aging population, spreading statism and increasingly difficult foreign relations.”

The world economy itself is at a crossroads as China comes to a point of no return in the real estate crisis. “The world economy does appear to be at a turning point,” Raja said. “While things can still go in any number of directions, it is also in a state of flux. People have to prepare for a more uncertain world, but we also need to have a sense of what our politicians and policy makers are saying. Expect more, as the demand for smart policies is only going to get higher.”

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