China has reached a point of no return in its battle to contain what could be the biggest housing crash the world has ever seen, experts warn, endangering the country’s communist leadership and the global economy .
As Western countries teeter on the brink of a potentially devastating recession next year, China also faces a slump thanks to a “total collapse” of ordinary people’s confidence in the market of the once energizing housing, the continued ravages of Beijing’s draconian zero. Covid strategy and an extreme heat wave that is affecting energy and food supplies.
The alarm is spreading in China that tough times are on the horizon, with Huawei CEO Ren Zhengfei causing a sensation this week when he warned that the chill of the economic downturn would be “felt by everyone” over the next decade.
President Xi Jinping arrives at the opening session of the Chinese People’s Political Consultative Conference in Beijing in March. Photograph: Carlos García Rawlins/Reuters
But just as it has become impossible for President Xi Jinping to reverse the massive lockdowns that have slowed economic activity, it also looks increasingly unlikely that he and his politburo will reverse the crackdown on reckless real estate lending that has led to a 40% drop in home sales this year.
The Chinese property market has driven growth over the past two decades and now represents the largest asset class in the world, with a theoretical value of between $55m (£47m) and $60m, which is larger than the total capitalization of US stocks. market Developers are now going bankrupt after being cut off from easy credit, prices are falling, homeowners are refusing to pay mortgages on unfinished homes, and property sales and construction are falling it is crippling local governments that depend on land sales for revenue.
A woman rides a motorbike next to a construction site in Beijing this month. Photo: Wu Hao/EPA
Gabriel Wildau, a China expert at global advisory firm Teneo, says Beijing faces a difficult time over whether to reverse its lending crackdown or redouble its attempts to “tame the beast” of lending activity. unproductive construction that has given rise to ghost towns and airports, as well as roads to nowhere.
“The government faces a difficult choice. But it’s like zero-Covid. They’ve come so far that they can’t go back because then it looks like an error of judgment or policy,” said Wildau.
“This is where the rubber hits the road. They want more high-tech growth and they don’t want as much real estate, but what’s replacing it? There’s been a complete collapse of confidence in the housing market. None industry can survive this.”
Trying to revive the economy was the focus of a huge package of measures unveiled by Beijing last week, including 300 billion yuan (£37 billion) in new infrastructure spending and an expansion of lending to local governments by of 500 billion yuan. Economists said the stimulus was not expected to have much of an impact on an economy already awash in investment finance. What is needed, they say, is for Chinese households to have more cash in their hands to rebalance the economy away from the tired old investment model. However, these policies are politically difficult because they threaten the established order of powerful party cadres, centralized state-owned enterprises, and local government panjandrums.
An unfinished skyscraper in Tianjin, China. Photo: Anadolu Agency/Getty Images
Wildau says Beijing has the money and the technocratic know-how to bail out the real estate sector, but it would be “very expensive.” So far it appears that Xi, despite the unleashed chaos, is sticking to the plan to cut excesses and make sure “houses are for living” rather than speculating.
So far, China’s export industries have held up well, and despite trade wars and lockdowns, the country has increased its share of global manufacturing since the pandemic began. Even that, however, is at risk because global demand looks likely to fall off a cliff over the next 12 months in a feedback loop that poses more danger to China.
Vehicles awaiting shipment at Yantai Port, Shandong Province. Photograph: VCG/Getty Images
As Ren’s comments on Huawei’s outlook highlighted, it’s not just China that faces uncertainty. Russia’s accelerated gas supplies and Western sanctions imposed over its invasion of Ukraine are fueling runaway inflation and stagnant growth, threatening a bleak winter for developed economies from the United States to Europe and Japan to Korea from the South The worst cost of living crisis in almost 50 years is slowly engulfing Western nations and this looks set to lead to reduced demand for Chinese-made products as households must focus on essentials such as food and fuel. US Federal Reserve Chairman Jerome Powell rattled stock markets on Friday, saying there would be pain for households and businesses as he signaled the central bank would keep raising rates until inflation is beaten down. .
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The fall in external demand is the “next shoe to drop” for China, according to David Llewellyn-Smith, chief strategist at investment and asset management firm Nucelus Wealth in Melbourne, and will leave China in a dangerous state
“The private sector is being hit by Omicron, the foreign sector is being hit by global weakness and the public sector is doing everything it can to pick up the slack, but is facing various inhibitions in fiscal policy. It’s a very toxic combination for in China. Very difficult to manage,” he says.
“A Chinese recession is absolutely in the picture next year. This will have incredible implications for global markets of all kinds.”
A boy wearing a mask runs through an art installation in a shopping mall in Beijing. Photograph: Ng Han Guan/AP
It’s unclear how the world is feeling the chill Ren has warned about, 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; fragile supply chains; political dysfunction in the US; digital disruption; and the accelerated effects of climate change. The challenges even led French President Emmanuel Macron to join the gloomy forecasts saying we are seeing the “end of plenty”.
Back in the global financial crisis of 2008-09, China came to the rescue of the global economy with a 4 trillion yuan stimulus. But with Beijing in the process of decoupling from the Western-led world order and growth fueled by unfavorable debt, another Chinese rescue mission seems highly unlikely. Instead, China faces Japan-style “lost decades” as it tries to absorb billions of dollars in real estate loans.
“In the short term, China’s economy is getting hammered,” says Rajah. “It remains to be seen what the consequences could be in the medium and long term. But China also faces very significant long-term headwinds from demographic decline and aging, growing statism, and its increasingly difficult external relations.”
And as China reaches its point of no return in the housing crisis, the world economy itself is also at a crossroads. “The world economy seems to be at an inflection point,” says Rajah, “although it’s also in a state of flux when things could still go in many directions. People need to prepare for a world much more uncertain, but we also have to expect much more from our politicians and policy makers, because the need for wise policy is ever greater.”