Point of no return: crunch time as China tries to fend off property crash | Chinese economy

CHina has reached a point of no return in her struggle to contain the biggest real estate crash the world has ever seen, experts warn, threatening the country’s communist leadership and the global economy.

While Western countries are on the brink of a potentially catastrophic recession in the coming year, China is also facing a collapse thanks to the “total collapse” of ordinary people’s confidence in the once thriving housing market, the ongoing ravages of Beijing’s draconian zero Covid strategy and an extreme heat wave affecting power and food supplies.

Alarms are spreading in China that difficult times are ahead, with Huawei CEO Ren Zhengfei creating a sensation this week when he warned that the chill of the economic downturn would be “felt by everyone” over the next decade.

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President Xi Jinping arrives for the opening session of the Chinese people's political consultation conference in Beijing in March.
President Xi Jinping arrives for the opening session of the Chinese people’s political consultation conference in Beijing in March. Photo: Carlos Garcia Rawlins/Reuters

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

The Chinese housing market has fueled growth over the past two decades and now represents the largest asset class in the world, with a face value between $55tn (£47tn) and $60tn, which is greater than the total capitalization of the US stock market. Now developers are going out of business after being deprived of easy credit, prices are falling, homeowners are refusing to pay mortgages on unfinished homes and the decline in property sales, and construction is crippling local governments that rely on land sales for revenue.

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A woman is riding a motorcycle next to a construction site in Beijing this month.
A woman is riding a motorcycle next to a construction site in Beijing this month. Photo: Wu Hao/EPA

Gabriel Wildau, a China expert at global consultancy Teneo, says Beijing is facing a pivotal moment in deciding whether to reverse or double down on its credit crackdown in its efforts to “tame the beast” of unproductive construction activities that have led to the rise of ghost towns and airports, as well as roads to nowhere.

“The government is faced with a difficult choice. But it’s like zero Covid. They’ve come to the point where they can’t go back because it would look like a misjudgment or a policy error,” Wildau said.

“Here comes the rubber on the road. They want more hi-tech growth and they don’t want so much real estate, but what will replace that? Confidence in the housing market has completely disappeared. No industry can compete with that.”

Trying to revive the economy was the focus of a massive package of measures unveiled by Beijing last week, including 300 billion yuan (£37 billion) in new infrastructure spending and a $500 billion expansion in loans to local governments. yuan. Economists said the stimulus was expected and may not have much of an impact in an economy already awash with investment financing. What is needed, they say, is for Chinese households to have more money in their hands to rebalance the economy away from the tired old investment model. Such policies, however, are politically difficult because they threaten the establishment of powerful party cadres, centralized state-owned enterprises and local government panjandrums.

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

Wildau says Beijing has the money and technocratic know-how to save the real estate sector, but it would be “very expensive”. So far, despite the chaos unleashed, Xi seems to be sticking to the plan to eradicate excesses and ensure “houses are for living in” rather than speculation.

So far, China’s export industries have held up well, and despite trade wars and lockdowns, the country has actually increased its share of world production since the start of the pandemic. But even that is at risk, as demand from around the world looks likely to fall off a cliff over the next 12 months into a feedback loop that poses more danger to China.

Wehicles are waiting for shipment at Yantai Port, Shandong Province.
Wehicles are waiting for shipment at Yantai Port, Shandong Province. Photo: VCG/Getty Images

As Ren’s comments on Huawei’s outlook highlighted, it’s not just China that faces uncertainty. Russia’s gas restrictions and Western sanctions imposed over its invasion of Ukraine are fueling runaway inflation and sluggish growth, threatening a bleak winter for developed economies from the US to Europe and from Japan to Japan. South Korea. The worst cost-of-living crisis in nearly 50 years is slowly engulfing western countries, and it certainly appears to be leading to reduced demand for goods made in China as households have to focus on essentials such as food and fuel. On Friday, US Federal Reserve chairman Jerome Powell shook the stock markets by saying there would be pain for households and businesses as he indicated the central bank would continue to raise interest rates until inflation is overcome.

Falling foreign demand is the “next shoe to fall” for China, according to David Llewellyn-Smith, the chief strategist at Melbourne-based investment and wealth management firm Nucelus Wealth, and will leave China in a dangerous state.

“The private sector is being hammered by Omicron, the external sector is being hammered by global weakness, and the public sector is doing what it can to accommodate the slack, but faces several constraints on fiscal policy. It’s a very toxic combination for China. Very difficult to manage,” he says.

“Next year there is definitely a Chinese recession in the making. That will have incredible implications for all types of global markets.”

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

How the world is feeling the chill Ren has warned about isn’t clear, but it adds an unknown factor to an already dangerous mix of problems, says Roland Rajah, the chief economist at the Lowy Institute, a think tank in Australia. These include: increasing geopolitical volatility; vulnerable supply chains; political dysfunction in the US; digital disruption; and the accelerating effects of climate change. The challenges even prompted French President Emmanuel Macron to join the bleak forecasts by saying we are seeing the “end of plenty.”

During the global financial crisis of 2008-09, China came to the rescue of the global economy with a 4 trillion yuan stimulus. But now that Beijing is in the process of disengaging from the western-led world order and debt-driven growth falling out of favor, another Chinese bailout seems highly unlikely. Instead, China faces “lost decades” in the style of Japan as it tries to absorb its billions of dollars in dud loans.

“In the short term, the Chinese economy will be hit hard,” Rajah said. “It remains to be seen what the medium to long-term consequences may be. But China is also facing very significant longer-term headwinds from demographic decline and aging, creeping statism and its increasingly difficult external relations.”

And while China is reaching its point of no return in its housing crisis, the global economy itself is also at the crossroads. “The global economy seems to be at a turning point,” says Rajah, “although it is also still moving, while things could still go in many directions. People need to prepare for a much more uncertain world, but we also need to expect more from our politicians and policy makers, as the need for sensible policy is only growing.”

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