November 27, 2023 - 11:45am
While few Brits envy China’s political system, some might look upon the Chinese economy and feel a twinge of inadequacy.
The Chinese have industries; we have industrial heritage museums. They run trade surpluses; we sink deeper into debt. They construct high-speed rail lines across thousands of kilometres; we cancel HS2. It’s hard to avoid the conclusion that we’re not just bourgeois — we’re decadent, too.
Except that, behind the facade of heroic productivity, the Chinese economy suffers from some all too familiar weaknesses.
The most obvious parallel is property. Whether in China or the UK, bricks and mortar is seen as a sound investment (thanks to escalating prices and the free flow of capital). The big difference is that while British developers struggle to provide enough new homes, their Chinese counterparts have been able to build, build, build — thanks to a planning system that eats Nimbys for breakfast.
The result is a building boom so big that it’s exhausted demand — leaving behind a lot of unwanted apartment blocks and a basically bankrupt property sector. Which, as previously noted, is why foreign investors are pulling out as fast as they can.
As for domestic investors, the great Chinese debt crisis is spilling over from property to finance. Last week brought the news that Zhongzhi — one of the largest of China’s so-called “shadow banks” — was in financial trouble. According to Reuters, the company “told investors it is heavily insolvent with up to $64 billion in liabilities”.
The shadow banking sector in China is huge — accounting for 40% of all loans. Though shadow banks tend to look and act like conventional banks, they aren’t regulated to the same degree. If one of them fails, it shouldn’t matter — but given the risk of contagion in a sector worth $3 trillion, some form of bailout seems likely.
In fact, Government efforts to keep the plates spinning are now plain for all to see. For instance, Bloomberg reports that regulators may soon allow conventional banks to offer unsecured loans to certain property companies. That sounds like throwing good money after bad, but it will take the pressure off the property sector, if only for a while.
Another major development is that the Government is unexpectedly borrowing an additional one trillion yuan (over £100 billion), which is exactly what you’d expect if the central authority were having to prop up a tottering system of debt-ridden property companies, financial institutions and local governments (who often fund the housing and infrastructure developments which fuel Chinese growth).
Of course, none of this means we should be complacent about our own economic failings. But it does mean we can reject the dangerous delusion that democracy is the reason why we’re in such trouble. In theory, a government that doesn’t have voters to worry about can take the tough decisions needed to secure the nation’s long-term prosperity. And yet China finds itself in a financial mess as bad as our own, if not worse.
President Xi Jinping may still use his clout to fix his country’s structural problems. However, if all he does is add to China’s debts while putting off reform, then he’s no more effective — but less sackable — than our own politicians.
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SubscribeIf people can’t talk about problems openly, and if. proposed solutions cannot be challenged and critiqued until the right solution is arrived at, then decision making will be very suboptimal. Unfortunately, thanks to cancel culture, western democracies have already imported that flaw from China.
“In theory, a government that doesn’t have voters to worry about can take the tough decisions needed to secure the nation’s long-term prosperity.”
In practice a government that doesn’t have voters to worry about is ripe for corruption
What about an economic system that doesn’t have voters to worry about? Don’t forget we had our own property debt bubble implosion not too long ago. This one is at least partly controlled by policy.
China does have to worry about the common people. But that all happens more at the local level. If they really didn’t care about the people they would just let the thing go, let the property/debt be destroyed and start again.
They only care about the ‘people’UH insofar as they want to protect themselves and their Autocracy. Dictators think first and last and all in between about themselves and maintaining their position. CCP quite prepared to kill/imprison/suppress millions if needed.
The temptation to distract with a surge across the Taiwanese straits should greatly worry us. The mother of all recessions would be but one of the dire consequences.
Yep. It would be huge. And for that reason I imagine the West won’t do much about it.
Would certainly be an awful testing moment, but I think we would react as the consequences of not doing so much worse. Alot of Chinese Navy would be sunk and the West coast of Taiwan not v conducive to amphibian landings. The CCP doesn’t hold all the cards. I reckon a blockade initially more likely and that’d be a major game of bluff. Resupplying Taiwan the challenge.
“If they really didn’t care about the people they would just let the thing go, let the property/debt be destroyed and start again.”
Not at all. Doing that would destroy global confidence in the Chinese economy and crash the currency. It is this the CCP is avoiding, not any collapse in confidence on the part of the people.
Oh yeah clearly very concerned about that. Just ask Jack Ma.
….and incompetence (eg. China’s “COVID Zero” policy).
Where there is a debtor there must be a creditor – very basic economics surely. To whom does China owe the trillions? Anyway, I thought the West was supposed to be dangerously in debt to China.
Remember that old saying from the 2008 credit crunch:
If you owe the bank one trillion dollars and you can’t pay then you and the bank are both in deep, deep trouble.
It’s other Chinese companies and individuals with savings and investments. So collapse in property market will set off huge chain reaction through Chinese economy and society. For example millions would lose their pension investments.
So it’s not foreign lenders who’d lose money first, but undoubtedly a collapse in Chinese demand would ripple worldwide.
Just as I suspected! Communists really can’t do Capitalism – it requires a freedom that sits uneasily with the demands of state control (and egalitarianism).
By the way, are you saying that China owes trillions of yuan to itself?
The Chinese government owes trillions of yuan to Chinese private investors.
Yes. Far easier to simply rejoice in a report saying that the Peoples’ Tractor Factory No.1 has made more tractors than it was required to under the latest Five Year Plan (whether that is true or not).
Pretty much.
Probably not large exposure by Western lenders – but some banks certainly will have large exposure – HSBC for one.
The whole thing (Chinese economy) looks very unstable. Not a sustainable growth model – and plenty of “fake growth” in there too.
China itself is actually not very indebted. It’s debt:GDP is something like 30% – which is around a level the West hasn’t seen since the glory days of leftist centrism.
It’s the local parties that are indebted. They borrow from state banks and from individuals.
The real problem for the building companies is that they sell off plan so they have massive debts to people for properties which will never be built and which when/if built would be worth far less than expected.
It’s misleading to tag this “explainer”. It’s opinion without much explanation. Really have a problem with this:
Does anyone blame democracy for the mess we’re in? And is that argument that democracy is detrimental to a nation’s long term prosperity? Someone better tell Sunak to drop the “long term decisions/long term future” line although perhaps he recognises that he’s about to be trounced by short term concerns.
And anyway part of the reason that China is having such trouble is because the government actually acted to try and deflate the property bubble.
For really interesting and actually useful analysis instead of one designed to play to existing prejudices without actually adding much search “china balance sheet recession”.
The worst kind of socialism is socialism for the rich. Because the Chinese economy is a capitalist industrial system uneasily duct-taped to a communist government, businessmen who, after being late to the party in any faddish oversupply of some industrial output are irresistibly tempted to turn to the government for a bailout. Whether the fad was for apartment buildings or cryptocurrency, any bailout always makes the problem worse. Just as with the US and its airline bailouts, unused Chinese real estate will now be a burden on the taxpayer.
The U.S. capital markets act as the thin red line that guards against the onslaught of government missteps and central bank meddling. They continue to be the largest, most liquid, most efficient in the world. For all our faults…and there are plenty…the U.S. will remain a good bet so long as our capital markets hold the line. China seems to miss this fundamental building block for investor confidence.