Beijing will struggle to
manage an economic downturn that most assuredly is getting worse
January 14, 2022 Updated: January 16, 2022
Vehicles make their way along a busy road past the Jing'an Temple in Shanghai on Oct. 14, 2021. (Hector Retamal/AFP via Getty Images)
Commentary
How will China’s economy perform in 2022?
Under the current economic
outlook, that question weighs heavily on the minds of China’s leadership.
One short answer is, “It
depends on who you ask.” But a much more honest one would be, “Much less than
Beijing needs.”
Beijing Managing Expectations
Of course, if you ask the
Chinese Communist Party (CCP), the answer will be aspirational. That’s because,
as the official Party line goes, only the CCP can guide the nation into a
bright and prosperous future. Without a thriving economy, the CCP has no
legitimate authority—and everybody knows it.
Hence, it’s no surprise
that Beijing will always put the economic reporting in the best light
possible–even if it’s not completely plausible to do so. To that end, the
official estimate for expected growth this year is in the 5.5 to 6 percent range.
But as mediocre as it is by
China’s standards over the past several decades, even 5.5 percent may be
unobtainable. It’s certainly a significant downgrade from 2021’s growth target
of 6 percent or more. In fact, after the post-pandemic bounce in the first half
of 2021, the Chinese economy slowed in the second half. Some estimates put it
at 4 percent in the fourth quarter.
Stagnation Hanging Around Real Estate Sector
Beijing would certainly
prefer a frothier number for 2022, but the threat of stagnation in key economic
sectors is real and growing, so that even 5.5 percent is looking like a tough
target to hit.
For example, property
development is a major driver of China’s economy, but it has yet to hit bottom
as the Evergrande contagion continues to unfold. Things are still getting worse
in that sector, not better. Knocking down a few dozen high rises in an
unfinished development won’t solve the problem. But it may well foreshadow things
to come.
Other real estate firms, in
addition to Evergrande, are finding themselves in financial hot water. Kaisa
Group, Fantasia Holdings, Modern Land (China), and others have all defaulted on both domestic and offshore bond payments.
Although the CCP is trying
to preserve the major players in the sector with financial bailouts of one sort
or another, no amount of financial jiggery-pokery will be enough to salvage a
string of massively over-leveraged development companies.
Sleight of Hand Won’t Be Enough to Conceal Debt Crisis
Beijing’s financial sleight
of hand may, on paper, “save” some companies with rate cuts, massive restructuring, and state ownership—but more defaults,
soft or otherwise, are likely to occur. Nor will the CCP be able to blunt the
overall impact on the crashing real estate market on the economy as a whole. Up
to one-third of development firms are expected to find themselves underwater
in 2022.
In fact, the ripple effect
could be stronger and more widespread than anticipated. This isn’t new or as
speculative as one might imagine. Recall how the crashing real estate market in
the United States, which comprised less
than 10 percent of GDP,
triggered a system-wide financial crisis. Real estate housing development and
related services make up about 30 percent of China’s GDP.
According to Ting Lu,
Nomura’s chief China economist, China’s entire 2022 GDP could be just 4.3
percent, about 20 percent less than even the Party’s dialed back expectations.
Municipal Bond Crash Coming Next?
But the housing market
isn’t the only red flag in China’s economy forecast. Local government funding
vehicles (LGFVs), which are essentially municipal bond issuers backstopping
otherwise unfunded local property and regional development projects, are also
deeply underwater. By the end of 2020, unpaid debt was about $8 trillion, or half of China’s
GDP. In 2021, LGFVs surpassed developers in foreign debt, owing offshore bondholders
$31 billion in bond payments that will be payable in 2022.
Land Sales and Housing Prices Continue to Fall
What’s more, new land sales
are expected to fall another 20 percent this year, even after a disastrous year in 2021, in which
land sales fell 17 percent year-over-year, with values dropping an average
of 9 percent. In an effort to shore up the ugly debt scenario, local ratings
services are fudging credit ratings.
How effective that is, or
how long that charade will last remains to be seen. But such a deceptive
exercise in itself is quite telling as to where things stand today–and where
they’re headed. That’s particularly relevant considering that residential
housing prices fell in December 2021 for the third month in a row and home sales are likely to drop another 10 percent this
year.
There’s little question
that the property crisis is ongoing.
CCP Virus Comes Home to Roost
To make things worse,
the CCP virus has found its way home back to China just in time for the
Winter Olympic Games. Regardless of what brief diversion the games may bring,
Beijing’s zero-tolerance policy means lockdowns and other stringent containment
measures will squelch productivity. Disruptions to production, shipping, and
consumer spending translates into even less economic activity.
People line up for nucleic acid testing during a citywide mass testing for the Covid-19 in Tianjin, China, on Jan. 9, 2022. (CNS photo via Reuters)
With the potential for
additional outbreaks in the next several months, retail sales may only grow by
3.7 percent this year, a measly one-quarter of last year’s 13 percent growth. That not only translates into just a fraction of demand for
goods, but also a high savings rate and negative consumer sentiment. Consumer
confidence hasn’t fallen this fast since the outbreak of
the CCP virus.
Tech Firms Fleeing China Amid Crackdown
Finally, in what bodes poorly
in the long term, a rising number of offshore tech companies are leaving China–for good. These aren’t small potatoes,
either. Giants such as Yahoo!, LinkedIn, Epic Games, and others are quickly
making their way out of China in response to Beijing’s tech crackdown on Alibaba, Didi, and Meituan. The regulatory climate has become much more difficult to operate
in and violations prohibitively expensive.
Beijing may try to put a
good face on its economic prospects for 2022, and the Winter Games will help
with that effort. But the fallout in the economy as a whole from these factors
and others has yet to be fully realized.
China’s downward economic
spiral may prove to be a more dangerous source of contagions than its Wuhan
laboratory.
Views
expressed in this article are the opinions of the author and do not necessarily
reflect the views of The Epoch Times.
https://www.theepochtimes.com/chinas-2022-economy-a-paper-dragon-burning_4207719.html
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