The year 2023 was supposed to be China’s economic comeback year, but lately, the world’s 2nd largest economy has been experiencing a fall after the COVID lockdown recovery.
So, what’s really going on?
Let’s first talk about the major factor behind all of this, which is, real Estate. The once biggest private property developer in China, Country Garden Holdings Co., published its annual report in April reporting that the economy of China was “back on track” and that this year China would see “growth soaring to new heights.”
But here’s the catch: shortly after the release of the report, whatever the economy of China recovered has now lost its control and an already slow real estate market started to collapse.
The presales of unfinished apartments, a key indicator of future revenue, reduced by over 50% in June and July, twice the rate of decline in the preceding 5 months. And last month, it missed 2 interest payments — signalling that it, too, was at risk of financial collapse, with $187 billion in debt.
Unfortunately, last week, it revealed a $7.1 billion loss for the first half of 2023, and now the lenders have very low hopes of getting repaid.
Next comes Evergrande Group, once the country’s second-largest developer by sales, which has filed for Chapter 15 bankruptcy protection in the U.S. Real estate is estimated to make up 30% of China’s GDP, and is also considered the world’s largest asset class of around $62 trillion.
The increased amount of defaults from property developers has raised Chinese banks’ non-performing loan rate to 4.4% by the end of 2022. And with such an increase in the real estate problems the debt crisis even more and any further signs of trouble could lead to the intervention of the Chinese government.
So, what measures have been taken to improve the situation?
China has introduced a series of new measures aimed at reviving the falling property market and supporting a weakening yuan to restore confidence.
Minimum down payments for mortgages have been slashed to 20% for first-time buyers and 30% for second-time buyers nationwide, down from the previous requirements of at least 30% to 40% (in cities such as Beijing and Shanghai).
Moreover, interest rates on new mortgages have been reduced by about 40 percentage points.
But, the challenges facing China’s economy are not limited to the real estate sector alone. There are multiple factors that contribute to its downward trajectory, including:
1. Drop in consumer Prices for the first time in 2 years signalling the fears of deflation.
2. Declining value of Chinese Yuan (¥).
3. Fall in exports and foreign direct investment.
4. Surprising decline in the population (in 2022) for the first time since 1961, which was not expected until 2029 or later.
5. China is also one of the world’s most expensive places to raise a family resulting in an all-time low fertility of 1.2 children per woman.
6. House sales have fallen 6.5% in 2023.
On the other hand, there is an increase in the overall debt-to-GDP ratio, which is about 300% and is still rising. The youth unemployment rate hit a record high of 21.3% in June, while around 11.6 million youths are estimated to graduate college this year.
The bottom line is that China is the second-biggest economy, which has sparked fears that its economic slowdown could be seen globally and trigger another global recession.
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