China: A sleeping giant or bear stuck in cave?
Under tremendous pressure from escalation of erupting wars, humanitarian concerns, and cracks in their property markets, is China exiting 2023 as the sleeping giant or a bear stuck in a cave?
2023 has been a challenging year for China. A declining birth rate, the first since the country's involvement in a war, cracks in the property sector, and an all-time high debt crisis paint a complex picture. On the foreign policy side, challenges persist with the extension of its mandatory conscription policy by a year in December 2022 to combat their dominance, a subdued political standoff in Hong Kong, and an exodus of global firms towards friendlier shores in a bid to "de-risk."
Despite the difficulties, China's situation isn't entirely bleak. International dependence on the World’s factory remains, despite many parts of the world perceiving China as a threat to their way of life, this way of life is largely only achievable due to the rise of Chinese production resulting from industrialisation.
China's projected slowdown is primarily fueled by issues surrounding property market defaults.
Property Market Defaults
In 2021, Evergrande became the world's most indebted property developer after taking on $340 billion in liabilities. News of its defaulting on payments rippled through economic news and had global implications with the best take away a hefty tax reduction for the year. After major restructuring, there was word of some investors accepted a return of just 30 cents on the dollar.
Why talk about 2021? If Evergrande looked like the sole concern for investors, it really much larger. According to the Financial Times, more than half of China's top 50 property developers have defaulted. This is particularly alarming as Country Garden, China's top private sector developer, has accumulated liabilities of over $200 billion and as of June, they have missed $11 billion in debt repayment. Alarm bells are ringing all over with the property market accounting for about 30% of their national GDP.
Moreover, the banks that have financed these developers are bearing the brunt of the butterfly effect. For example, the Bank of Cangzhou has been hit by the spillover, with customers lining up to withdraw cash, after hearing rumours over unpaid loans, insolvency and liquidity crisis. This escapade resulted in protests and arrests over the dissatisfaction and spreading of misinformation.
China's financial woes don't stop there. As of 2023, there is a looming debt crisis waiting to be resolved. Goldman Sachs has estimated that provincial debt has amounted to $23 trillion, accounting for roughly about 15% of the national GDP. In comparison, the US provincial debt is $2.4 trillion, accounting for 4.9% of their national GDP. While the rationale for their high provincial debt was to spur growth, it seems China's halting is akin to a train that has lost control of its brakes.
What are they going to do? China is in a unique situation, but is not alone in this. Ray Dalio has emphasized the importance of history, and just as you have it, we can trace evidence of a halting slowdown after strong periods of unresisted growth to their neighbor in the far East, Japan. After their Lost Decade, here is what China could be leaning towards:
Potential Solutions
Expansionary Fiscal Policy:
CPI data shows that China’s inflation is dangerously low; thus, it urgently needs domestic stimulus to promote consumption. China has already taken steps in this direction by introducing sovereign bonds of 1 trillion RMB ($140 billion) in October.
Restructuring Production:
China’s reliance on being the world’s producer has not fallen apart. However, with the exodus of American giants like Apple, the world is looking for alternatives in India, Mexico, Vietnam, and Indonesia. Due to foreign policy and bureaucratic barriers, China faces a decision in the near future about their determination in opening its markets or choosing to take a step back.
Foreign Policy Easing:
As exemplified by the APEC summit, President Xi has explicitly indicated China’s disinterest in Taiwan over its economic stability and has affirmed China’s commitment to open trade with the West. If China can uphold this policy of peace, it can continue to play the flute to the tune of economic growth and Chinese dominance.
In conclusion, the challenges China faces in 2023 are significant, but potential solutions exist. Given the nature of the World economy, if China fails to correct the incoming train, the world will feel the repercussions likely on a scale smaller or comparable to the 2008 Financial Crisis.
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