by Philip Pilkington
Thursday, 11
August 2022
Analysis
07:00

China’s economy isn’t going to implode

The country has survived similar crises before
by Philip Pilkington
Credit: Getty

The Chinese property market is in crisis, again, less than a year out from the country’s last. In late 2021, Evergrande, China’s second largest property developer, missed payments on its loans. Yet, the following quarter China logged a healthy annual growth rate of 4.8% in GDP.

It is true that the recent crisis looks more far-reaching. After all, Evergrande was just one company, albeit a rather large one. But the current crisis has the issuance of residential mortgage-backed securities (RMBS) falling by 92%. A crash in RMBS issuance suggests a major contraction in the number of mortgages being issued and has grim echoes of the MBS markets seizing up in Western countries in 2007-08.


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Yet, this too is not without recent precedent. In 2014-2015 RMBS issuance was at roughly the same levels that we see today. The impact on the housing market was far larger than Evergrande: new home construction fell by just over 5% and inflation-adjusted house prices plummeted by a historic rate of -7.3% in the second quarter of 2015. Most people working in markets at the time thought that the Chinese housing market — and with it the Chinese economy — was toast.

Such an analysis was perfectly reasonable. After all, China’s property market accounts for anywhere between 18% and 30% of GDP. And it is rare for a market to take the sort of hit that China’s did in 2014-15 and then immediately bounce back. But bounce back it did. In the first quarter 2016, inflation-adjusted prices started to grow again and by the fourth quarter of the same year they were steaming ahead at around +7.1% annual growth. Newly built homes duly responded to the rising prices and by 2017 they were growing by over 12% per year.

The point is that China has beaten its doubters before. Last time we saw the RMBS market collapse in China in 2014-15, the lull did not last long. The reason for this appears to be that China’s real estate sector is largely controlled by the government. Whether through direct government contract issuance or through pressure on Chinese Communist Party (CCP) connected businessmen, the Chinese state appears to be able to dictate the terms of investment.

China also appears to have a debt system immune from widespread default. During the Asian Tigers crisis in the late-1990s, the Chinese government set up so-called Asset Management Companies (AMCs) whose job it is to take bad debt onto their books and, with the help of the money-creating powers of the Chinese central bank, make them disappear. Lately these AMCs have been stuffed full of bad property debt and while there are reports that they are bulging at the seams that are way beyond capacity, there is nothing to stop the government from simply creating more.

The fact of the matter is that the Chinese economy is a hybrid, not a purely market-driven economy. Consumer goods are distributed in the same manner as we see in Western market economies, but the pace of investment and the finance system is controlled by the government. For this reason, indicators that warn of disaster in market economies fail when applied to China’s partially planned economy. This is not to say that the Chinese state will not slip up and create a recession. It might. But it would be a failure of policy on the part of the Chinese, not a purely market-driven collapse of the sort we are used to in the West.

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Peter B
Peter B
3 months ago

If you take any numbers produced by the Chinese government at face value – as this author appears to – your chances of understanding what is actually happening are pretty low.
The CCP will eventually discover that you cannot buck the market for ever. There is a massive build up of bad debt becoming evident in China at present. Housing is a disaster – a literal Ponzi scheme. Countries duped into signing up for Belt and Road are now defaulting or is severe trouble (Sri Lanka, Pakistan, Bangladesh, …). The future demographics for China are terrible.

Billy Bob
Billy Bob
3 months ago
Reply to  Peter B

I tend to take much of what this author writes with a pinch of salt. Everything is unrelentingly positive towards autocrats such as Xi and Putin, whilst simultaneously proclaiming the west is one day away from implosion.

Prashant Kotak
Prashant Kotak
3 months ago
Reply to  Peter B

Look it’s fine, UnHerd supports an eclectic mix of opinions no matter how batty and we should seek to keep that going, there is no reason why the Beijing payroll should not be accommodated.

Dominic A
Dominic A
3 months ago
Reply to  Prashant Kotak

Indeed, it is a major strength of open systems that dissenting voices, even propaganda is allowed – it reveals a whole lot about the speaker, their organisation or country, and they may even make some good points (your enemy is sometimes your best critic).

Al Hut
Al Hut
3 months ago

As someone in the financial sector I must say your optimism is one of extreme delusion. China faces similar problems the US faced in the 1930s, the great difference is the US had an open market and a massive war coming that they were not initially part of, and the current Superpower that needed bailing out. The US had a growing population and a population they could lean on for financial support, they had natural resources and considerable agricultural resources. This is not the case with China, they have a shrinking youth population, a nation that has no wealth except fake property that will never have value and their geography causes serious issues around water, food supply and most importantly oil imports. Basically, China is going to end up like every nation before since 1950 that has been said will be the next superpower or tiger from Japan, Taiwan, EU, Mexico, Venezuela and the list goes on.
now that china is below the 6% growth target they will no longer be able to manage the international debt over the next 10 years. This will cause serious civil unrest, supply shocks and hopefully the complete and utter collapse of the CCP.
Socialist communism thankfully has its own internal self-destruct button and that button is being beaten every day by the CCP with every stupid action they take.
If I hear another idiot talk about the west plans on year and the Chinese plan for centuries I
m going to explore. If that were the case they would not have killed 40million people during the great leap forward. They would not have built +10million empty apartments they will never be completed and fall to pieces in 15 years. they would not have had the 1 child policy, they would not have the zero covid policy. The CCP planning only shows their absolute incompetence and gangsterism that least them to plan for immediate self-preservation.

Max Price
Max Price
3 months ago
Reply to  Al Hut

The idea China thinks in centuries or whatever does my head in as well. It seems like one of those things that some Western commentator said once and it just gets repeated over and over again.
I don’t see much long term thinking from the CCP at all. All I see is them flailing about kicking own goals.

JP Martin
JP Martin
3 months ago

I’ve lost count of how many times I’ve read that the Three Gorges Dam is about to flood half of China or that the country has already fallen off a demographic cliff. Maybe it’s all copium, I don’t know. I’ll be the first to confess that I have no idea where to get reliable analysis of China.

rob monks
rob monks
3 months ago

good to have a viewpoint which isn’t hysterical about China.
There are too many Western self appointed arm chair experts or laptop experts on China who want to put down the country.
an interesting piece Philip