China has reached a point of no return in its battle to contain what could be the biggest property crash the world has ever seen, experts believe, creating a perilous moment for the country’s Communist leadership and the global economy.
As western countries stand on the edge of a potentially ruinous recession in the coming year, China is also facing a slump thanks to “total collapse” of confidence among ordinary people in the once-buoyant housing market, the continued ravages of Beijing’s draconian zero-Covid strategy and an extreme heatwave that is affecting the supply of power and food.
Alarm is spreading in China that tough times are on the horizon, with the chief executive of Huawei, Ren Zhengfei, causing a sensation this week when he warned that the chill from economic downturn would be “felt by everyone” for the next decade.
But just as it has become impossible for President Xi Jinping to U-turn on the mass lockdowns that have stunted economic activity, it also appears increasingly unlikely that he and his politburo will reverse the crackdown on reckless lending in the property market that has led to a 40% fall in the sale of homes this year.
The Chinese housing market has driven growth for the past two decades and now represents the biggest asset class in the world, with a notional value of between $55tn (£47tn) and $60tn, which is bigger than the total capitalisation of the US stock market. Now developers are going bust after being deprived of easy credit, prices are falling, homeowners are refusing to pay mortgages on unfinished homes and the slump in properties being sold and construction is crippling local governments that rely on land sales for income.
Gabriel Wildau, a China expert at the global advisory firm Teneo, says Beijing faces a crunch moment over whether to reverse the crackdown on lending or double down in its attempts to “tame the beast” of unproductive construction activity that has resulted in the emergence of ghost towns and airports, as well as roads to nowhere.
“The government faces a hard choice. But it’s like zero-Covid. They have come so far they can’t turn back because then it looks like a misjudgment or policy error,” Wildau said.
“This is where the rubber hits the road. They want more hi-tech growth and they don’t want as much real estate, but what replaces that? There’s been a total collapse of confidence in the housing market. No industry can survive that.”
Trying to reinvigorate the economy was the focus of a huge package of measures unveiled by Beijing in the past week, including 300bn yuan (£37bn) in new infrastructure spending and an extension of borrowing to local governments worth 500bn yuan. Economists said the stimulus was expected and may not make much impact in an economy already awash with investment funding. What is needed, they say, is for Chinese households to have more cash in their hands to rebalance the economy away from the tired old investment model. However, such policies are politically difficult because they threaten the established order of powerful party cadres, centralised state-owned enterprises and local government panjandrums.
Wildau says Beijing has the money and the technocratic knowhow to bail out the property sector but it would be “very expensive”. So far it looks as though Xi, despite the chaos unleashed, is sticking to the plan to stamp out excesses and make sure that “houses are for living in” rather than speculation.
So far China’s export industries have held up well and, despite trade wars and lockdowns, the country has actually increased its share of world manufacturing since the pandemic began. Even that, however, is at risk because demand from around the world seems likely to fall off a cliff during the coming 12 months in a feedback loop that spells more danger for China.
As Ren’s comments on the outlook for Huawei highlighted, its not just China that faces uncertainty. Russia’s throttling of gas supplies and western sanctions imposed over its invasion of Ukraine are fuelling runaway inflation and stalling growth, threatening a bleak winter for developed economies from the US to Europe, and from Japan to South Korea. The worst cost of living crisis for nearly 50 years is slowly engulfing western nations and that seems certain to lead to reduced demand for Chinese-made goods as households have to focus on essentials such as food and fuel. On Friday, the chair of the US Federal Reserve, Jerome Powell, shook stock markets by saying there would be pain for households and businesses as he indicated the central bank would keep raising rates until inflation is vanquished.
Falling external demand is the “next shoe to drop” for China, according to David Llewellyn-Smith, the chief strategist at the investment and asset management firm Nucelus Wealth in Melbourne, and will leave China in a perilous state.
“The private sector is being hammered by Omicron, the external sector hammered by global weakness, and public sector doing what it can to pick up the slack but it faces various inhibitions on fiscal policy. It’s a very toxic combo for China. Very difficult to manage,” he says.
“A Chinese recession is absolutely in the frame over next year. That’s going to have incredible implications for global markets of all kinds.”
Quite how the world feels the chill that Ren has warned about is not clear, but it adds an unknown factor to an already dangerous mix of issues, says Roland Rajah, the lead economist at the Lowy Institute, a thinktank in Australia. These include: mounting geopolitical volatility; fragile supply chains; political dysfunction in the US; digital disruption; and the accelerating effects of climate change. The challenges even prompted the French president, Emmanuel Macron, to join in the gloomy forecasts by saying that the we are seeing the “end of abundance”.
Back in global financial crisis of 2008-09, China rode to the rescue of the world economy with a 4tn yuan stimulus. But with Beijing in the process of decoupling from the western-led world order and debt-driven growth out of favour, another Chinese rescue mission seems very unlikely. Instead, China faces Japan-style “lost decades” as it tries to absorb the billions of dollars of dud property loans.
“In the short-term China’s economy is being hammered,” Rajah says. “It remains to be seen what the medium- to long-term consequences could be. But China also faces very significant longer-term headwinds from demographic decline and ageing, creeping statism, and its increasingly difficult external relations.”
And as China reaches its point of no return in its housing crisis, the world economy itself is also at the crossroads. “The world economy does appear to be at a turning point,” says Rajah, “though it is also still in a state of flux when things could still go in any number of directions. People have to prepare for a much more uncertain world but we also need to expect much more from our politicians and policymakers, because the need for wise policy is only getting higher and higher.”
