April 2024

Half-hearted measures

Yvonne Gill highlights the crises besetting the Chinese economy, and weighs up premier Li Qiang’s somewhat lukewarm strategy for recovery

The Chinese economy is a strange hybrid, wedded at the same time to both socialism and capitalism. Even before the former Soviet Union collapsed, the Chinese Communist Party (CCP) leadership – already hobnobbing with the West in the name of Sino-US rapprochement –turned China’s ailing socialist system on its head, gradually introducing wide-ranging market reforms and opening up the economy to foreign direct investment in the late 1970s.

Typical of Communist leaders providing ideological justification for major policy changes, Deng Xiaoping, the chief architect of the reforms, gave the slogan of Four Modernizations– a euphemism for embracing the market economy, which, in effect, was a reversal of socialism. Given the world’s largest educated working population and a large land mass rich in natural resources, as against the high wages in the developed world, a massive spurt of foreign investments and transfer of the latest technology from the West transformed China from an impoverished centrally-planned economy to a manufacturing powerhouse of the world in the last 40 years or so.

Deng_Xiaoping_at_the_arrival_ceremony_for_the_Vice_Premier_of_China
AGENT OF CHANGE: Former Chinese leader Deng Xiaoping, chief architect of reforms

While the economic system did undergo a sea-change, the CCP’s grip on the political system remained intact. China embarked on a path of high growth, fuelled by highly competitive low-cost exports, unprecedented infrastructure and real estate development propelled by huge doses of debt and subsidies. Chinese billionaires and Communist leaders literally rubbed shoulders until Xi Jinping came to power a little over a decade ago.

Xi began to gradually tighten the screws on the neo-rich class and the democratic aspirations of the economically-empowered middle class. High growth is intrinsically cyclical, and unless market forces are allowed to play their role, a debt and subsidy-based model is bound to collapse. An autocratic system of governance only aggravates the crisis.

Even before Covid-19 struck, the Chinese economy was showing signs of an imminent collapse, notwithstanding attempts by the CCP leadership to introduce half-baked measures to avert the impending collapse of the market, bogged in the unsustainable debts of China’s gargantuan real estate sector – the largest in the world and accounting for around 20 per cent of the Chinese economy. Real estate also represents 60 to 80 percent of household assets and families today are struggling to meet mortgage repayment commitments due to increasing interest rates.

China’s debt-to-GDP ratio reached a whopping 288 per cent last year

Growth rates are sagging and the debt burden is piling up. China’s debt-to-GDP ratio reached a whopping 288 per cent last year.With major real estate companies going bankrupt, the huge real estate bubble created by a state-administered policy of debt-induced growth has burst.

There is an unprecedented inventory of build-up properties and sales have fallen by a third. In August 2023, it was estimated that there were 60 to 80 million empty apartments in China. The government also tried to save the jobs of construction workers by ordering banks to resume lending for the completion of half-built projects. But this will only worsen the crisis by adding new apartments to existing unsold ones. Worst affected are businesses and individuals who bought houses as speculative investments, not as places to live or work. Despite large foreign exchange reserves, the renminbi hit a 16-year low in September last year. The government has been selling foreign reserves and buying renminbi to shore up the currency.

In August 2023, it was estimated that there were 60 to 80 million empty apartments in China

Another dimension of the crisis is that provincial and local governments have been profiting by financing real estate development and sales of public land to real estate developers as the housing sector boomed.  Goldman Sachs estimated these earnings at $8.4 trillion or nearly 50 per cent of GDP. With this source having dried up, many local governments have had to cut pay for municipal workers and drastically reduce expenditure on developmental and welfare projects. In many cities, the salaries of teachers, public transportation workers and public security officers have gone unpaid.

Provincial governments are resorting to borrowing to meet their expenses. Their accumulated debts amounted to $23 trillion in 2023, according to another Goldman Sachs estimate. Out of the 31 provinces and municipalities in the country, 14 provinces are in financial crisis. The Chinese finance ministry has thus begun a programme to provide financial assistance to provincial and local governments. Property tax, proposed to be introduced as a source of revenue, will adversely impact the already stressed real estate markets.

Screen shows Chinese Premier Li Qiang delivering a speech at the opening ceremony of China Development Forum (CDF) 2024, in Beijing
Chinese Premier Li Qiang delivering his opening speech at the China Development Forum

Meanwhile, Xi has come up with his latest slogan: new, quality productive forces, aimed at fixing the country’s economic woes. Although it is not clear how the government will incentivise the people to spend more, the plan is to spur growth through massive investments in manufacturing, high-tech and clean energy, as wellas research & development.

Delivering his opening speech at the China Development Forum, Premier Li Qiang tried to come up with an elaboration of Xi’s new-found slogan. Those who attended the Forum held annually included Apple CEO Tim Cook, Evan Greenberg, chairman and chief executive of the Chubb Group, and Mike Henry, chief executive of Australian mining giant BHP, among other top executives.

Li said the government is planning to provide legal residency for the more than 250 million people from farm families who have moved to cities but don’t qualify for residency. In China, cities provide far higher medical, retirement and educational benefits than rural areas. A citizen needs a permit to live in cities and enjoy the benefits.

Briefly mentioning the real estate collapse and local government debts, Li stated that ‘risks and challenges have not defeated us over the past four decades’. He made a general call for increased production of goods and services and consumption, asking Chinese households to replace old cars and household appliances. Yet Li didnot outline any concrete measures to address the burgeoning real estate and local government debts that could soon have a cascading effect on the Chinese financial sector and the economy at large.

The emphasis on enhanced manufacturing has alarmed the European Union, which is preparing to impose tariffs on electric cars from China. The EU Chamber of Commerce has warned that the policy could lead to deindustrialisation in Europe, as European companies may not be able to compete with government-backed Chinese businesses, while exports to China would decline due to low demand.

A survey by the European Union Chamber of Commerce in China has indicated that one in ten companies is moving its investments out of China and one in five is delaying or considering withdrawing its investments. The same survey showed that two-fifths of Chinese customers or suppliers are moving investments out of China.

China is facing the worst crisis since it embarked on the path of economic reforms and high growth. Labour unrest led tomore than 140 strikes across the country in the first five months of 2023, according to China’s labour newsletter. The governmenthas stopped releasing data on the unemployment rate for people between the ages of 25 and 59.

Given the half-hearted measures being taken by Beijing, combined with the CCP’s bias against private sector enterprises that happen to be the largest contributors to the country’s GDP, employment and exports, China could witness a prolonged period of low growth rate and could remain caught in the ‘middle-income country trap’ for several years to come.

Yvonne Gill is a freelance journalist based in London