The Chinese economy is in trouble: “What we’re going to see with China, for the first time that anyone can remember that’s alive, is an economy that’s twice the size of the United States, maybe three times the size of states. United States, and it’s going to be very weird living in this world,” Elon Musk said on the “All-In with Chamath, Jason, Sacks & Friedberg” podcast.
At first glance, Musk seems correct. China is rapidly catching up with America. Last year, China’s economy soared 8.1%, producing $17.46 trillion in gross domestic product. The US economy reached $23 trillion, growing only 5.7%.
Yes, Musk is America’s leading visionary, but that particular vision is not targeted. China’s economy will never surpass America’s, at least not in this century.
Elon Musk makes predictions by extrapolating. Extrapolation works most of the time, but not now.
The Chinese economy – and the nation as a whole – is going through a series of inflection points. The most fundamental is demographic: China’s population is on track for a steep decline. The most immediate inflection point is economic: China is now contracting. However, the country needs growth to repay a monumental debt.
We begin with the “relentless maker and breaker of civilizations”, demography. Demography will break up China which, according to demographers from Xian Jiaotong University, should lose half of its population in 45 years. By the end of this century, China could be about a third less populated than it is now.
The country is therefore facing the greatest demographic decline in history in the absence of war or disease. Panic efforts to stave off decline – moving from a one-child policy in 2015 to a three-child policy in 2021, for example – have proven unsuccessful in boosting birth rates
Such a steep drop means that if China is to overtake America for the top spot, it will have to do so within, say, a decade before a population decline begins to undermine economic performance. Over the next ten years, however, the Chinese economy is more likely to collapse.
He is already in distress. In April, the economy clearly contracted. Industrial production fell 2.9% compared to the same month last year. Retail sales fell 11.1%. New car sales fell 47.6%.
The draconian shutdowns, the result of Beijing’s “dynamic zero-COVID” policy, have essentially crippled much of the eastern part of the country, the heart of the national economy. Chinese ports and airports are operating well below capacity, and river and road traffic is down by around 40%.
China cannot ship what it does not produce. The factories are closed or in difficulty. Even politically favored companies have been hit hard. Tesla’s Gigafactory 3 in Shanghai was closed for three weeks due to the COVID lockdown. Now, due to a lack of parts, it only runs at 45% of its capacity.
Beijing, by abandoning flawed disease control policies, may eventually reverse the economic damage. What it cannot do is escape the consequences of its unprecedented indebtedness. No one knows how much debt China has racked up, but an estimate of 350% of annual gross domestic product seems about right. Due to the famous “hidden debt”, the number could even be higher.
Whatever the debt, China now faces a settling of scores. Beijing avoided a slowdown in 2008 by overstimulating the economy, mainly with debt-financed infrastructure. Now the country must either repay the debt or deal with the situation in other ways.
Many believe that because there are not many external obligations, the crisis will be easy to resolve. Yes, the Chinese people owe themselves money, but these types of crises, history shows, are the hardest to solve because each solution requires domestic parties – not foreign bankers – to suffer. . Beijing is trying to further delay the reckoning because it is concerned about social stability, which means resolving the case will take much longer than now believed.
In the meantime, the debt-ridden housing sector is beyond repair. Property developers, especially from last September, missed payments and defaulted on their obligations. The Evergrande Group, once China’s largest real estate developer, has racked up a staggering $305 billion in bonds and is struggling, even with full government support. It’s actually been saved for now, but the smaller developers are falling. Sunac China, now the fourth-largest developer, narrowly missed a bail payment and said it had no plans to make any further bail payments.
On the surface, the situation appears manageable. New home prices in 70 major cities in April fell just 0.2% from the previous month. The market, however, was “frozen”, in other words, buyers and sellers were too far apart on price for trades to take place.
“We don’t see the collapse in prices yet,” Anne Stevenson-Yang of J Capital Research told John Batchelor of “CBS Eye on the World” on Wednesday. “The Chinese government has been sneaking a lot of money into developers so they can keep their inventory off the market and avoid a 30, 40, 50% discount.”
Government intervention can maintain prices, but it cannot force sales. Property sales by value fell 46.6% year-on-year last month, the biggest drop since August 2006.
Developers adapt. New construction starts, as measured by floor area in April, were down 44.2% from the same month last year. As a result, the demand for construction materials is collapsing.
The indications for the future of the real estate market and, consequently, of the economy do not look good. Real estate accounts for somewhere between 25% and 30% of total GDP. About 70% of Chinese people’s household wealth is tied to property. Apartments have become more than assets in China. In China, they have become a store of wealth, the equivalent of money.
This type of Chinese “currency” seems to be losing value as confidence disappears. Investors withdrew a record $17.5 billion in portfolio assets – stocks and bonds – from China in March. The US-based Institute of International Finance notes that capital outflows were limited to China and were not part of a broader flight from emerging markets. The pullback continued a trend evident in February. Capital flight is apparently continuing.
This trend will continue especially as the US Federal Reserve continues to raise US interest rates while the People’s Bank of China, China’s central bank, cannot adjust to rate hikes. The Chinese monetary authorities are now caught in an impasse. They must lower rates to stimulate the economy, but such measures would aggravate capital flight.
The renminbi, one of the world’s strongest currencies last year, is now weak, down about 7% in the past three months. Last month was the worst ever for the Chinese currency.
The Communist Party, unwilling to implement structural reforms, adopts measures of last resort. “Lockdowns have something to do with preventing people from knowing about it and preventing people from complaining about it,” said Stevenson-Yang, also an author of China alone: coming out of isolation and potential return to isolation. “That’s what China usually does, is to prevent the information from flowing rather than actually addressing the problem. And they will do more of that over time.
Beijing is good at censorship, but the toll on China’s economy comes in nonetheless. China is rapidly approaching its death spiral, the point of no return, where fear grips the markets in a final crisis.
Gordon G. Chang is the author of The Coming Collapse of China and The Great US-China Tech War. Follow him on Twitter @GordonGChange. Chang is also an editor for 1945.