Source: FT Few things matter more for the world economy in 2023 than China’s fortunes. Not since the reform period began, have there been more serious question marks over the trajectory of China’s growth. The 2015-6 near-miss crisis, when the RMB depreciated and capital flooded out of China was a more acute moment of danger. Fear of a repetition still hangs over the current scene. But in 2015-6, the growth engine was not spluttering to the same degree. China did not face the kind of labour market pressures it does today, with youth unemployment rising towards 20 percent and graduates uncertain of their future employment. Nor was China in 2015/6 facing an avalanche in its real estate sector.
Excellent analysis! I’ll add in another wrinkle. The health fallout from the mass Covid jabs is only beginning. All the evidence suggests that there will be years of excess deaths ahead. Rapid decline in the number of younger, healthier workers and a further decline in north rates will have a whole variety of ramifications for the economy. I don’t see China being the economic threat that the Western media and think tanks are making it out to be. I think the jab related problems are going to throw in a curve ball with side effects most analysts have yet to think about. I say China is going to go into severe decline economically, socially and politically just as the West is, leading not to a competitive but reasonably stable “multi-polar world” but more like an unstable, Mad Max style of “every country and alliance for themselves” until several new, undisputed totalitarian rivals develop. IMP, the World Bank, IMF, etc. understand that the relatively stable, multi-polar world is something of a pipe dream and are attempting to pre-empt the crisis by becoming the sole global totalitarians. The Chinese people may be starting to put a fly in their ointment, though, with their anti-communist movement, about which the western press has little to say (for obvious reasons).
Perhaps you could revisit this topic in 12 months, and see if China's government does indeed have good reason to be quietly confident. I suspect in the CPC's history, it has dealt with far worse problems.
Comparing Chinese and American standards is dangerous. Far too many Americans live in prefabs or mobile homes that are cramped, poorly insulated and count as planned obsolescence. Please compare with EU standards!
This article sounds familiar... a prominent economist ranting about a subject far from his area of expertise (China's economy) and making fatuous predictions about it...
1990. China's economy has come to a halt. The Economist
1996. China's economy will face a hard landing. The Economist
1998. China's economy’s dangerous period of sluggish growth. The Economist
1999. Likelihood of a hard landing for the Chinese economy. Bank of Canada
2000. China currency move nails hard landing risk coffin. Chicago Tribune
2001. A hard landing in China. Wilbanks, Smith & Thomas
2002. China Seeks a Soft Economic Landing. Westchester University
2003. Banking crisis imperils China. New York Times
2004. The great fall of China? The Economist
2005. The Risk of a Hard Landing in China. Nouriel Roubini
2006. Can China Achieve a Soft Landing? International Economy
2007. Can China avoid a hard landing? TIME
2008. Hard Landing In China? Forbes
2009. China's hard landing. China must find a way to recover. Fortune
2010: Hard landing coming in China. Nouriel Roubini
2011: Chinese Hard Landing Closer Than You Think. Business Insider
2012: Economic News from China: Hard Landing. American Interest
2013: A Hard Landing In China. Zero Hedge
2014. A hard landing in China. CNBC
2015. Congratulations, You Got Yourself A Chinese Hard Landing. Forbes
2016. Hard landing looms for China. The Economist
2017. Is China's Economy Going To Crash? National Interest
2018. China's Coming Financial Meltdown. The Daily Reckoning.
2019 China's Economic Slowdown: How worried should we be? BBC2020. Coronavirus Could End China's Decades-Long Economic Growth Streak. NY Times
2021 Chinese economy risks deeper slowdown than markets realize. Bloomberg
2022. China Surprise Data Could Spell R-e-c-e-s-s-i-o-n. Bloomberg.
The image that comes to mind is an investment strategy that is the polar opposite of the speculative market forces that nearly tanked the American economy in 2008, as Adam so effectively demonstrated in his history of the subprime mortgage debacle, "Crashed". Instead of a tsunami of overseas investment funds looking for a safe haven in the American real estate market, accentuating the pressures to write 'liar loans' for would-be homeowners and small investors who hoped to capitalize on the American building boom, China apparently took the opposite course within its own domestic economy, but for similar reasons, to wit, residential building construction was made to bear the burden of commercial investment for the simple reason that other forms of industrial investment or yielding zero or negative returns, because they were dependent upon China's ability to export its goods abroad in the face of increasing overseas resistance within international markets to China's export and international trade practices. China was perceived as an international bully, and foreign markets reacted accordingly. The fact that a sizable fraction of construction starts amounting to a majority of projects under construction from 2011 through 2021 as shown on the Residential Real Estate Chart: Annual Pre-Sales and Completions were underwater, meaning that less than half of the projects' floorspace went to completion, compared with the base years of 1999 through 2001, where completions peaked at what looks to be 900 million square meters in 2014 before leveling off in a declining trend line that ends up at 800 million square meters in 2021 (Red Line). The black bar shows an ascending curve of new residential units contracted-for-but unbuilt, that takes off after a small decline between 2007 and 2009, and what looks to be an ascending trendline going from 10 percent (?) to 35 percent (?) of construction agreements written (and mortgage payments due) on what are described as Pre-Sales Agreements for sold but unbuilt residential housing units. Whatever you want to call it, it looks like these new mortgage commitments are being used to complete stalled construction projects that will not be occupied (and paying rent) for an indeterminate amount of time. What the chart illustrates is a classic Ponzi scheme that is bound to fail because the same dollar cannot be spent twice! Stalled projects under construction suffer a double whammy because contractors and subcontractors cannot be paid because construction funds are implicitly inadequate to complete the projects as specified in the construction documents, and the punitive owners of those uncompleted or nonexistent units are most likely not able to continue making mortgage payments on residential units that may not ever be started, much less completed. The further implication is that China's central planning function has proven to be completely inadequate to the situation that it created. China does not rely on income taxes to raise capital funds for public infrastructure projects and associated governmental services. The result is that it appears that these massive urban construction projects are all privately financed by consortiums of individual investors, and that the whole edifice is about to go bust. Most of us know that in authoritarian societies, bribery and favoritism tend to dominate commercial activity, with the mutual backscratching that we see in Russia, Hungary, and elsewhere. Under the circumstances, what counts is cash flow. Whether those contracted-for residential housing units are ever built is asking the wrong question; what counts is cash flow. Money is fungible, and can be used for any purpose. Authoritarian regimes thumb their nose at the rule of law, and this is the inevitable outcome, when officials' palms are greased with investors money that inevitably will be misused, because that's the way things work in those countries. We're just seeing the tip of the iceberg.
FYI: I included this link in my last link collection post at the end of Jan as it had good insights (I am still writing a post on China's problems that nobody talks about e.g. property prices in demographic decline as in Japan, the fact that Chinese don't own the land and what happens to values when the land leases near the as in Singapore etc):
The Chinese Property Market: The Most Important Industry Globally Which Few Understand (Platinum Asset Management)
"A property implosion was 2022’s China crisis narrative. We have owned Chinese property companies, namely China Resources Land and China Overseas Land & Investment over the past year, which have performed well. The Chinese property sector provides an apt case study of the reverse of an asset price bubble.[1] Indeed, it looks to us like a good example of an "anti-bubble"."
"There is no evidence of any meaningful glut of properties in China.
Has there been malinvestment? Yes.
Is there evidence of a nationwide excess of housing units? No."
Loss of revenue at the local government level is what almost bankrupted the state of California and did bankrupt several cities following the GFC. It's a chronically underappreciated issue.
Excellent analysis! I’ll add in another wrinkle. The health fallout from the mass Covid jabs is only beginning. All the evidence suggests that there will be years of excess deaths ahead. Rapid decline in the number of younger, healthier workers and a further decline in north rates will have a whole variety of ramifications for the economy. I don’t see China being the economic threat that the Western media and think tanks are making it out to be. I think the jab related problems are going to throw in a curve ball with side effects most analysts have yet to think about. I say China is going to go into severe decline economically, socially and politically just as the West is, leading not to a competitive but reasonably stable “multi-polar world” but more like an unstable, Mad Max style of “every country and alliance for themselves” until several new, undisputed totalitarian rivals develop. IMP, the World Bank, IMF, etc. understand that the relatively stable, multi-polar world is something of a pipe dream and are attempting to pre-empt the crisis by becoming the sole global totalitarians. The Chinese people may be starting to put a fly in their ointment, though, with their anti-communist movement, about which the western press has little to say (for obvious reasons).
Perhaps you could revisit this topic in 12 months, and see if China's government does indeed have good reason to be quietly confident. I suspect in the CPC's history, it has dealt with far worse problems.
Comparing Chinese and American standards is dangerous. Far too many Americans live in prefabs or mobile homes that are cramped, poorly insulated and count as planned obsolescence. Please compare with EU standards!
Using presales to pay to finish other projects? How is that not a Ponzi scheme?
This article sounds familiar... a prominent economist ranting about a subject far from his area of expertise (China's economy) and making fatuous predictions about it...
1990. China's economy has come to a halt. The Economist
1996. China's economy will face a hard landing. The Economist
1998. China's economy’s dangerous period of sluggish growth. The Economist
1999. Likelihood of a hard landing for the Chinese economy. Bank of Canada
2000. China currency move nails hard landing risk coffin. Chicago Tribune
2001. A hard landing in China. Wilbanks, Smith & Thomas
2002. China Seeks a Soft Economic Landing. Westchester University
2003. Banking crisis imperils China. New York Times
2004. The great fall of China? The Economist
2005. The Risk of a Hard Landing in China. Nouriel Roubini
2006. Can China Achieve a Soft Landing? International Economy
2007. Can China avoid a hard landing? TIME
2008. Hard Landing In China? Forbes
2009. China's hard landing. China must find a way to recover. Fortune
2010: Hard landing coming in China. Nouriel Roubini
2011: Chinese Hard Landing Closer Than You Think. Business Insider
2012: Economic News from China: Hard Landing. American Interest
2013: A Hard Landing In China. Zero Hedge
2014. A hard landing in China. CNBC
2015. Congratulations, You Got Yourself A Chinese Hard Landing. Forbes
2016. Hard landing looms for China. The Economist
2017. Is China's Economy Going To Crash? National Interest
2018. China's Coming Financial Meltdown. The Daily Reckoning.
2019 China's Economic Slowdown: How worried should we be? BBC2020. Coronavirus Could End China's Decades-Long Economic Growth Streak. NY Times
2021 Chinese economy risks deeper slowdown than markets realize. Bloomberg
2022. China Surprise Data Could Spell R-e-c-e-s-s-i-o-n. Bloomberg.
Thanks! Great briefing on this topic.
The image that comes to mind is an investment strategy that is the polar opposite of the speculative market forces that nearly tanked the American economy in 2008, as Adam so effectively demonstrated in his history of the subprime mortgage debacle, "Crashed". Instead of a tsunami of overseas investment funds looking for a safe haven in the American real estate market, accentuating the pressures to write 'liar loans' for would-be homeowners and small investors who hoped to capitalize on the American building boom, China apparently took the opposite course within its own domestic economy, but for similar reasons, to wit, residential building construction was made to bear the burden of commercial investment for the simple reason that other forms of industrial investment or yielding zero or negative returns, because they were dependent upon China's ability to export its goods abroad in the face of increasing overseas resistance within international markets to China's export and international trade practices. China was perceived as an international bully, and foreign markets reacted accordingly. The fact that a sizable fraction of construction starts amounting to a majority of projects under construction from 2011 through 2021 as shown on the Residential Real Estate Chart: Annual Pre-Sales and Completions were underwater, meaning that less than half of the projects' floorspace went to completion, compared with the base years of 1999 through 2001, where completions peaked at what looks to be 900 million square meters in 2014 before leveling off in a declining trend line that ends up at 800 million square meters in 2021 (Red Line). The black bar shows an ascending curve of new residential units contracted-for-but unbuilt, that takes off after a small decline between 2007 and 2009, and what looks to be an ascending trendline going from 10 percent (?) to 35 percent (?) of construction agreements written (and mortgage payments due) on what are described as Pre-Sales Agreements for sold but unbuilt residential housing units. Whatever you want to call it, it looks like these new mortgage commitments are being used to complete stalled construction projects that will not be occupied (and paying rent) for an indeterminate amount of time. What the chart illustrates is a classic Ponzi scheme that is bound to fail because the same dollar cannot be spent twice! Stalled projects under construction suffer a double whammy because contractors and subcontractors cannot be paid because construction funds are implicitly inadequate to complete the projects as specified in the construction documents, and the punitive owners of those uncompleted or nonexistent units are most likely not able to continue making mortgage payments on residential units that may not ever be started, much less completed. The further implication is that China's central planning function has proven to be completely inadequate to the situation that it created. China does not rely on income taxes to raise capital funds for public infrastructure projects and associated governmental services. The result is that it appears that these massive urban construction projects are all privately financed by consortiums of individual investors, and that the whole edifice is about to go bust. Most of us know that in authoritarian societies, bribery and favoritism tend to dominate commercial activity, with the mutual backscratching that we see in Russia, Hungary, and elsewhere. Under the circumstances, what counts is cash flow. Whether those contracted-for residential housing units are ever built is asking the wrong question; what counts is cash flow. Money is fungible, and can be used for any purpose. Authoritarian regimes thumb their nose at the rule of law, and this is the inevitable outcome, when officials' palms are greased with investors money that inevitably will be misused, because that's the way things work in those countries. We're just seeing the tip of the iceberg.
FYI: I included this link in my last link collection post at the end of Jan as it had good insights (I am still writing a post on China's problems that nobody talks about e.g. property prices in demographic decline as in Japan, the fact that Chinese don't own the land and what happens to values when the land leases near the as in Singapore etc):
The Chinese Property Market: The Most Important Industry Globally Which Few Understand (Platinum Asset Management)
https://www.platinum.com.au/Insights-Tools/The-Journal/Chinese-Property-Market-Anti-Bubble
"A property implosion was 2022’s China crisis narrative. We have owned Chinese property companies, namely China Resources Land and China Overseas Land & Investment over the past year, which have performed well. The Chinese property sector provides an apt case study of the reverse of an asset price bubble.[1] Indeed, it looks to us like a good example of an "anti-bubble"."
"There is no evidence of any meaningful glut of properties in China.
Has there been malinvestment? Yes.
Is there evidence of a nationwide excess of housing units? No."
Loss of revenue at the local government level is what almost bankrupted the state of California and did bankrupt several cities following the GFC. It's a chronically underappreciated issue.