Communist-ruled China is amid an economic slowdown. With deflating property prices and Covid-19 lockdowns, the country is steering through a period of high unemployment and low growth.
This became evident in July this year when the International Monetary Fund (IMF) described its economic situation as ‘a worse-than-anticipated slowdown.’ It noted, “In China, further lockdowns and the deepening real estate crisis have led growth to be revised down by 1.1 percentage points, with major global spillovers.”
The international financial institution has projected a mere 3.3% growth in real GDP for the year 2022. Reportedly, this marks the slowest change in China’s economic output in the past 40 years (except 2020).
According to economist Raymond Yeung, unemployment has now hit an all-time high of 20% in Chinese cities. With decreasing consumption and prioritisation of essentials, the property market has taken a severe hit.
The situation has been exacerbated by drought, extreme heat, energy crunch and the country’s zero-Covid policy. On August 20, investment banks Nomura and Goldman Sachs further slashed China’s GDP forecast to 2.8% and 3% respectively from 3.3%.
Property crash in China
The property slump in China has been marked by a simultaneous decline in the production of cement and steel. Whiles speaking about the matter to The Guardian, climate expert Lauri Myllyvirta remarked, “Steel was recovering but is now falling again, which reflects the intense distress in the real estate sector. “
As per reports, over 50 million apartments are currently unoccupied in China. Unfinished housing projects and the inability of mortgage holders to make payments to the developers have added to the crisis.
According to S&P Global Ratings, about 40% of developers in China are in deep financial trouble. The latest case of Evergrande, defaulting on its debt payment of $US 300billion, exemplifies the situation.
This is a matter of concern for a country where real estate forms 70% of the household wealth. Finance Professor at Peking University, Michael Pettis, highlighted that China’s property slump is the culmination of 30 years of unchecked rise in property prices.
“Property developers had historically depended on rising home prices and surging sales to justify massive leverage and overbuilding. But once the bubble began to deflate last year, these over-leveraged property developers ran into serious liquidity and credit constraints that made it impossible for them to complete their construction projects,” he said.
Pettis pointed out that real estate developers have not yet delivered 40% of flats they sold between 2013-2020 in advance. Although he ruled out a sharp economic contraction, the Finance Professor has predicted a prolonged period of low growth for China.
To boost growth and spending, the Chinese government has decided to lower interest rates and sell more bonds. Pettis is of the view that it will not yield results and households will avoid burdening themselves with more debt.
Banks inflating loan numbers
China is pressuring its banks to lend people money and pump credit into its economy. The coercive action has made Chinese banks boost loan volumes artificially, reported Bloomberg.
One of the tactics involved sanctioning loans to companies and then asking them to deposit the funds in the bank at the same interest. Another method employed by the State-owned banks was short-term financing to each other, which was then shown as a ‘new loan’ in record books.
This was confirmed to Bloomberg anonymously by executives, working at 6 different banks. With consumer demand at its lowest since 2007 and uncertainty at its peak, attempts at indiscriminate lending have not helped improve credit or stimulate loan growth.
This becomes evident from the case of a well-established electronics supplier in Zhejiang. According to Bloomberg, the company was offered loans by several banks at extremely low rates. Despite this, the firm refused to borrow any money.
“We’re not considering borrowing because our cash can fully cover our operations and modest growth. The Covid outbreaks and property downturn have had an impact on us,” the company’s CEO Albert stated.
According to Bloomberg, State-owned banks are also unwilling to lend to small businesses due to a lack of collateral and valid credit records. One electric vehicle component maker in Anhui told the news organisation that the firm received only 60% of the sanctioned loans due to low debt repayment ability.
Chinese banks, which are already under pressure due to the economic slowdown, also face the risk of non-performing loans. An estimated 30% of all loans are in the property sector and banks can face $356 billion in mortgage losses if borrowers continue to threaten a boycott.
As such, banks are squeezed between an over-demanding Chinese government on one side and risk management challenges on the other. “The pressure on non-performing loans to rebound increased as the downward pressure on the economy was gradually felt by the financial sector,” remarked CBIRC official Liu Zhongrui.
Rising unemployment in China
Amidst an economic slowdown, China is faced with a unemployment crisis. According to the country’s Ministry of Human Resources and Social Security, unemployment outlays increased to $US 5.45 billion in June this year.
The figure is 3.6 times higher than the monthly payout by China’s unemployment insurance system for June 2021. There was also a 20% increase in beneficiaries, leading to a deficit of 22.7 billion Yuan. Reportedly, it is the biggest shortfall since March 2020 when a deficit of 15.6 billion Yuan was recorded by the insurance system.
According to the Economics correspondent of The Guardian, Peter Hannam, about 1-in-5 people in Chinese cities between 16-24 is looking for work. With more people graduating, the competition for jobs has become cut-throat.
Among the gathering clouds over the Chinese economy is rising the jobless rate among young people. About 1-in-5 people in cities between 16-24 is looking for work. (Source: @ANZ_Research) pic.twitter.com/4H6BLaFfTL
— Peter Hannam (@p_hannam) August 17, 2022
The Chinese government is incentivising companies that keep workers on the payroll. Large corporations can now receive up to a 50% refund of their unemployment insurance contribution from last year. The same has been increased to 90% for small and mid-size companies.
Interestingly, the unemployment insurance fund has been on the decline since 2019, when the Sino-American trade war broke out. Economist Takamoto Suzuki told Nikkei Asia, “There’s a strong possibility that the unemployment insurance system will end up running a deficit for the full year in 2022.”
He concluded, “If the fund balance persistently continues to decrease, it will become more difficult to engage in programs that citizens will welcome, such as extending the duration of insurance benefits or expanding eligibility for payments.”
While our eyes are fixated on the economies of Sri Lanka and Bangladesh, China’s slowing economy and its ramifications are what will probably dominate the Asian and the world headlines in the months to come.
