Evergrande and the Chinese economy

The collapse last week of China’s largest property developer, Evergrande, marked the inevitable conclusion to a saga that exposes the flaws in the Chinese economic model. Evergrande has been on life support for the past two years with enormous debts that required state intervention if it were to survive. But even in China, there is a limit to the extent that municipal and provincial governments can absorb debt. The consequence is that a Hong Kong court ordered the liquidation of the property giant.

Evergrande is not the first property developer to collapse. Some 50 other entities have also met their demise, the consequence of an unsustainable property bubble that has resulted in entire cities of unoccupied multi storey apartments. 

For the past two decades, the Chinese real estate market has boomed, with housing becoming about a quarter of the nation’s GDP but the country now faces a future of oversupply and shrinking demand. Rapid ageing, high youth unemployment, an antiquated taxation system and stalled productivity have resulted in the present crisis. Xi Jinping’s politicisation of regulation exacerbates the existing problems.

Despite optimistic projections by the regime, China’s economy faces significant headwinds. There is little indication that Xi and his coterie understand the challenges - let alone the solutions - given his ideological pursuits.

This is not to say that the Chinese economy is about to collapse. It is still the world’s second largest, and the biggest export nation, producing about a third of global manufacturing. But it has reached its peak, and will plateau for the foreseeable future.

Contrary to the overly-optimistic forecasts from people with a vested interest in the ongoing China boom, a number of long-term factors are shaping its economy - indeed, its way of life. These trends were present before Xi came to power, but they have expanded under him. Covid also compounded the situation.

Three major factors are contributing to the country’s challenges. The most obvious is the real estate crisis. Housing has been the major repository of household wealth in China. But the sector now faces shrinking demand and oversupply, trends that will not disappear, if at all, for many years.

The housing crisis is exacerbated by the rapid decline in the birth rate and the ageing of the population. The birthrate is now far below the level it was when the one-child policy was abandoned. Official data suggests that the fertility rate is now 1.1, although some demographic observers believe it has fallen below 1. Absent immigration, a birthrate of one child per woman results in a halving of the population each generation! The regime recognises the challenge, encouraging families to have more children and introducing measures to assist. With the possible exception of Hungary, no country with a birthrate so low has been able to reverse it.

This spells an economic disaster for China. Its population is ageing, it has relatively low levels of education and high youth unemployment. These issues will not be resolved easily or soon.

Thirdly, the nation’s debt level is very high. Even though the national debt is not the problem, the debt amassed by municipal and provincial governments, state-owned enterprises and private entities like Evergrande is enormous. Even household debt has increased in recent years.

These factors are being compounded by Xi Jinping’s ‘decoupling’ of the Chinese economy - and similar measures by other nations to ‘de-risk’ their reliance on China. New national security laws, which are both vague in their wording and arbitrary in their application, increasingly make investment in - even travel to China more problematic. 

The recent postponement of the politburo’s economic session has raised doubts about the regime’s response to the challenges. The session was to map the country’s economic direction for 2024.

Bullish predictions about China have mostly disappeared. The blue skies are much more overcast, a forecast that will remain for the foreseeable future

First published in the Epoch Times Australia.