The Chinese economy is in decline. What is happening and why is it important for Australia? | China
China, the world’s second largest economy, is going through tough economic times marked by continued Covid crackdowns.
The timing is bad, given that China is preparing for the 20th National Congress of the Communist Party in November, which is expected to extend President Xi Jinping’s grip on power.
But the issues go beyond the pandemic and include a deflating housing bubble. Here we break down China’s economic outlook – and what it means for Australia and other countries.
How is China?
Last month, the International Monetary Fund (IMF) cut its forecast for China’s GDP growth for 2022 by a quarter, to 3.3%. That would be the slowest pace in four decades – excluding the Covid crisis decline in 2020 – and below the government’s 5.5% target.
In July, nearly all data, from retail sales and manufacturing to investment, beat expectations, said Raymond Yeung, ANZ’s chief economist for greater China.
“My biggest worry is jobs,” he says, pointing to the youth unemployment rate of 20% in cities, the highest ever recorded.
Lockdowns to enforce China’s zero Covid policy aren’t just hurting current growth, Yeung said. Future consumption would also be reduced, while more jobless young people would weaken support for the Chinese property market.
Record heat and the worst drought in decades also add to the woes.
Why it matters to Australia (and beyond)
Australia’s economic fortunes are tied to China’s, even as we are warned that its military threat is the worst in decades.
China is by far Australia’s largest bilateral trading partner, accounting for around a third of all trade. In June alone, Australian exports to China (excluding Hong Kong) topped $16.3 billion, nearly double imports of $8.8 billion, according to the Australian Bureau of Statistics. The trade was about 140 times higher than in January 1988, when the data series began.
Before Covid, China rivaled New Zealand as the main source of short-term visitors, approaching 1.5 million in 2019. It also provided almost 40% of international students, about double the share of the country. ‘India.
China dominates global demand for many commodities, consuming 70% of global iron ore exports, much of which is mined from the Pilbara.
But China’s coal and oil imports are falling, says Lauri Myllyvirta, senior analyst at the Center for Energy and Clean Air Research. “The combination of slowing demand and a drive for energy and resource self-sufficiency in China is going to be a double whammy for commodity exporters.”
Real estate pains are mounting
Myllyvirta thinks China’s decline in cement and steel production in July is worth watching and aligns with the real estate crisis. “Steel was recovering but falling again, reflecting the intense distress in the real estate sector.”
This pain is becoming increasingly evident as developers fail and thousands of mortgagees refuse to make payments for apartments that may never be built. Undated graphic images of demolitions are also circulating on social media, as are reports of empty 50m² apartments.
Ironically, Beijing caused some of the slowdown in an effort to rebalance an economy that was overly dependent on property. The ensuing stall hit developers such as Evergrande, which defaulted on part of its $300 billion (A$437 billion) debt.
Last week, S&P Global Ratings estimated that 40% of developers were in “financial trouble”, with mortgage boycotts posing both social stability and economic risks.
“If strikes became widespread, they could undermine financial stability, especially if they lead to a sharp drop in house prices,” said S&P analyst Harry Hu.
A July S&P report estimated that loans worth up to 2.4 billion yuan (A$500 billion) could be affected by the boycotts.
Real estate bubble with Chinese characteristics
Michael Pettis, professor of finance at Peking University’s Guanghua School of Management, has long warned of the dangers created by 30 years of rising property prices.
While China’s economy is about three-quarters the size of the United States or Europe, real estate assets have exploded to double the size of America and triple that of Europe. The result inflates both the sense of wealth in China, but also a huge misallocation of resources.
Pettis recently noted that developers have yet to deliver about 40% of the homes they pre-sold between 2013 and 2020 — in relatively good times.
“Real estate developers had always relied on rising house prices and surging sales to justify massive leverage and overbuilding,” he wrote. “But once the bubble started to deflate last year, these overleveraged property developers ran into serious liquidity and credit constraints that prevented them from completing their construction projects.”
But whereas excessive debt in the United States in the 1920s and in Japan in the 1970s-80s preceded the “calamities”, Beijing’s control over banks and much else in the economy suggests a downturn rather than a slump, Pettis said.
“Domestic financial conditions are such that China is still unlikely to experience a financial crisis or a sharp economic contraction,” he said. “It’s much more likely, in my view, that the country faces a very long period of low growth, Japanese style.”
He said interest rate cuts, including Monday, are unlikely to prompt much additional borrowing as households and businesses deleverage rather than take on more debt.
Big miners remain optimistic – even as iron ore prices have fallen by a third since April. They are counting on China to pull itself out of a slump, as it has done regularly for decades.
“We expect China to become a source of stability for commodity demand in the coming year, with political support gradually building,” BHP chief executive Mike BHP said last week. Henry.
“The Problem of Aging”
Much like in Japan, an aging or even shrinking Chinese population will add to real estate headwinds and dampen the broader economy.
China’s population could be on the verge of starting to decline if it hasn’t already. That would make it the first contraction since the Great Famine of the late 1950s, Unravel reported. That post cited the Shanghai Academy of Social Sciences’ forecast of an average annual decline of 1.1% after 2021.
If this were to continue, China’s population would more than halve, from 1.4 billion to 587 million by 2100.
However, Jane Golley, an economics professor at ANU’s Crawford School of Public Policy, is wary of the “collapses” that have routinely predicted China’s impending economic demise.
“‘China’s debt bomb looks set to explode’ – people have been saying this for years,” Golley said. “At some point it may well happen, but I don’t think it will happen this year just because of the Covid-zero policy.”
Research on China’s abandoned one-child policy has indicated a decline in fertility explained between one-third and one-quarter of per capita income growth in China over the past few decades.
“If you stop having babies, you reduce youth dependency and so you get an increase in the working-age population,” Golley said. “It increases per capita income.”
She said raising the retirement age, integrating more women into the labor market and increasing productivity in poor rural areas “can contribute significantly to the solving the problem of aging”.
Rather than continuing to achieve annual GDP growth rates of 8%, China will likely average 2-3% in the future, Golley said. “Anything above that makes it the biggest economy in the world in our lifetime. And that means it’s a force to be reckoned with.