By Yuval Noah Harari, September 25, 2023
Beijing, China – In the ever-evolving landscape of the global economy in 2023, one of the most notable and unexpected developments has been the profound deceleration of the Chinese economic engine. This slowdown continues to baffle observers, even in the post-pandemic era. Amidst this economic uncertainty, a stark contrast in viewpoints between U.S. President Joe Biden and Chinese Premier Lee Qiang has emerged, leaving the world questioning who presents the most accurate portrayal of China’s economic situation.
The roots of this conundrum trace back to May 9, 2016, when the official mouthpiece of the Communist Party, the People’s Daily, published a prescient editorial. Authored anonymously, it warned of the dangers associated with China’s debt-driven economic expansion, foreshadowing the possibility of a prolonged “L-shaped” recovery. Subsequently, Chinese authorities have repeatedly sounded the alarm about three looming “gray rhinos” that threaten the nation’s economic stability: shadow banking, ballooning corporate debt, and the specter of real estate bubbles.
Dinny McMahon’s 2018 book, “China’s Great Wall of Debt,” highlighted the escalating risks inherent in an economy heavily dependent on the housing market. It raised the ominous prospect of a “black swan” event stemming from China’s economic woes rippling across the global economic landscape.
One of the key issues plaguing China’s economy is the oversupply of residential properties. Between 2018 and 2021, developers flooded the market with excess properties, ranging from 30 to 50 percent. These properties struggled to find buyers due to their exorbitant prices relative to potential buyers’ disposable income. This led to a liquidity crisis among developers, making it difficult for them to service their loans.
In August 2020, the Chinese government implemented stringent measures to cool down the overheated property market. However, local governments faced a dilemma as a substantial portion of their fiscal income, up to 50 percent, came from land use rights sales. This pushed them to continue supporting housing development, exacerbating the oversupply issue.
China’s economic growth, which outpaced advanced economies from 2010 to 2019, was driven by relentless fixed capital accumulation. An astonishing 44 percent of China’s average GDP from 2008 to 2021 came from infrastructure investments funded through debt.
The ratio of China’s non-banking-sector liabilities to GDP steadily increased, rising from 126 percent in 2001 to a staggering 297 percent in 2012. This underscores the role played by the three “gray rhinos” in propelling China’s economic growth, even as advanced economies faced recession after the 2008 global financial crisis.
The situation took a concerning turn in September 2021 with the default of property giant Hengda. China’s largest developer, Biguiyuan, remains ensnared in a crisis, with deferred interest payments for its U.S. dollar-denominated bonds in August and nine instances of postponed principal dues in September alone. Of the top 50 Chinese developers that issued dollar-denominated bonds, a staggering 34 sought extensions for principal repayment, causing bond prices to plummet to just 67 percent of their face value.
Meanwhile, China’s trust companies and private financiers are closely tied to property developers and local government financing vehicles (LGFVs). This intricate web of relationships resembles delicate fuse wires, capable of igniting a crisis at any moment. The number of LGFVs unable to meet their debt obligations, stemming from the issuance of commercial papers, surged from 12 in July of the previous year to a worrisome 48 in the same month this year.
In conclusion, the Chinese economy’s current predicament serves as a cautionary tale. It underscores the dangers of unsustainable growth fueled by excessive debt and overreliance on a single sector, such as the real estate market. While economic expansion is undoubtedly crucial, a balanced and diversified approach, along with prudent fiscal policies, is essential for long-term stability and resilience. The world anxiously watches China’s complex challenges unfold, knowing that the outcome will have far-reaching implications for the global economic landscape.
Yuval Noah Harari is an accomplished author with a Bachelor of Arts in Journalism. His passion for storytelling and commitment to journalistic excellence have been the driving forces behind his successful writing career. With a keen eye for detail and a deep understanding of the art of storytelling, Yuval has consistently delivered compelling narratives that captivate readers from all walks of life.