Why China is facing headwinds from all directions, real estate crisis to sluggish bank growth

China’s property sector is grappling with huge losses, manufacturing has been shrinking, and youth unemployment hit a record high in June. ‘Economy progressed too fast,’ expert says.

Residential buildings in Yuanyang built by Chinese developer Evergrande, which posted a loss of $4.53 billion for the first six months of this year on 27 August | Commons

New Delhi: When university students in China donned their graduation robes this summer, many did not pose for the usual photos depicting jubilation and victory. Instead, they flooded social media platforms with snaps hinting at dejection and despair. Some posed as corpses, others appeared to bin their graduation theses.

These viral photos were the result of one of China’s most pressing economic challenges: the alarmingly high youth unemployment rate, which soared to 21.4 per cent in June, when the 11.6 million newly minted college graduates were poised to enter the job market.

The Chinese government responded to the students’ despair by suspending the public release of unemployment data from July. Similarly, vital economic reports, such as for exports and cement production, have also either disappeared or become “corrupted”, reported Insider.

However, there are plenty of other indications that China’s economy has hit more than a rough patch.

The country’s real estate sector is grappling with staggering losses, banks are facing sluggish growth, and manufacturing activity has been shrinking for months.

The latest hairy data point comes from Country Garden, China’s largest developer, which reported a $6.7 billion loss for the first half of 2023 Wednesday. In its regulatory filing, Country Garden went so far as to warn of defaulting on its liabilities if the situation deteriorates further.

“The Group [Country Garden] might not be able to fulfill the financial covenants of these borrowings, which may result in default of these borrowings and cross-default in certain other borrowings,” the filing noted.

Currently, Country Garden’s debt is reportedly above $150 billion. Last month, it also announced that it had failed to make repayments worth $22.5 million on two US Dollar bonds. Further, it has sought to delay repayments on a private onshore (Chinese) bond for the first time, according to Reuters.

Evergrande Group, another major Chinese developer, is also struggling. The company is reportedly laden with over $300 billion in debt, posting a total of $81 billion in losses for 2021 and 2022. Additionally, it reported a further loss of $4.53 billion for the first six months of this year Sunday.

But the headwinds facing China extend well beyond real estate. The manufacturing sector in China contracted for the fifth consecutive month in August, according to data from the National Bureau of Statistics.

The agency reported a marginal increase in the manufacturing Purchasing Managers’ Index (PMI) from 49.3 in July to 49.7 in August. However, a PMI of only 50 or above indicates economic expansion, so this figure still suggests that the manufacturing sector is contracting.

Then, the world’s largest bank by total assets, the Industrial and Commercial Bank of China Ltd. (ICBC) and the Bank of China (BoC) both posted sluggish profit growth for the first half of the year Wednesday. ICBC posted profit growth of 1.2 per cent, while BoC managed a meagre 0.78 per cent growth compared to the same period last year.

The banks warned of regional debt risks, with the BoC chief risk officer even highlighting that some local government financing vehicles (LGFVs) had defaulted, reported Reuters.

These factors, coupled with record-high youth unemployment in June and an overall unemployment rate of 5.3 per cent in July, have led to concerns that China’s economic issues may be deep-rooted and systemic rather than cyclical.

“The problem in China is that its economy progressed too fast to develop proper mechanisms and systems to regulate it effectively,” explained Aravind Yelery, an associate professor at Jawaharlal Nehru University, speaking to ThePrint.

Cash ‘hoarding’ up, investments down

Chinese households and companies have been piling up hundreds of billions of dollars in long-term deposits, as traditional investment options like real estate and the stock market have become less attractive in the current economic climate.

According to a Bloomberg report, household savings jumped $1.8 trillion in the first nine months of 2022. Further, a Reuters analysis found that about $766.12 billion worth of certificates of deposit (CDs) were issued in the first quarter of this year until March.

The Reuters analysis points out that these long-term deposits mean that households and domestic investors are looking to hoard cash rather than risk treading “treacherous” economic and regulatory waters, even if the interest rates are lower— a liquidity trap similarly faced by Japan in the 1990s.

“[Household] savings are at 50 per cent historically in China. The people have always had a culture of saving,” explained Sriparna Pathak, an associate professor of Chinese studies at O.P. Jindal Global University.

She noted that in the past, the preferred way to invest these savings was in property or real estate but given the current conditions, these avenues have become less popular.

“China’s export-led economic development model has led to domestic consumption being ignored systematically, even though this is an important facet of the economy,” she added.

Pathak pointed out that land in China cannot be owned but is leased for approximately 70 years, which previously drove up real estate prices and made it an attractive investment.

However, as the real estate market boomed, companies like Evergrande, following the “growth at all costs” mantra, accumulated excessive debt.

In 2021, the government in Beijing imposed restrictions curbing the ease by which real estate companies could access liquidity (cash) in the market, and thus the market began to fall, explained Pathak.

According to Yelery, domestic investors were thrown for a loop. “[Domestic] investors do not know what to invest in. It has always been real estate before, but they are not confident in the real estate market today, so what would they invest in?” he said.

Notably, a hunger for real estate has been evident across the various levels of government in China. As ThePrint reported earlier, Beijing has been facing a large local government debt burden as provinces pushed to increase land revenue through sales, and used the funds on big-ticket infrastructure projects that have not all been economically feasible.

To reverse its economic fortunes, Beijing seems to have again turned to pushing big-ticket infra projects, according to media reports.

For instance, Finance Minister Liu Kun and Zheng Shanjie, the chairman of the National Development and Reform Commission, have indicated their aim to ensure that local governments issue the full quota of 3.8 trillion renminbi yuan (approximately $520 billion) worth of new special local bonds by the end of September, reported Bloomberg.

Lack of investor confidence 

The real estate debt crisis has cast a shadow over other sectors of the economy.

For instance, according to a Bloomberg report, China’s $2.9 trillion trust industry could potentially witness losses of up to $38 billion. Zhongzhi Enterprise Group Co. and its affiliate, Zhongrong International Trust Co., have missed interest repayments to at least six publicly listed companies.

Zhongrong International had assets under management worth $109.1 billion, as reported by Nikkei. According to the Chinese Trustee Association (CTA), 7.38 per cent of all investments held by trusts are in the real estate sector as of March 2023.

“Foreign investors are sceptical about the Chinese markets given the Zhongrong case along with the troubles faced by the real estate market in China,” explained Pathak.

Echoing these sentiments, Yelery pointed out that foreign, private (domestic), and individual investors alike are struggling to identify promising investment opportunities in this difficult market, amidst the possibility of an economic slowdown triggered by the real estate market.

“The government in Beijing has always come out with a stimulus package in the event of an economic crisis. But this time there is no bazooka of sorts, further dampening business sentiment,” said Pathak.

(Edited by Asavari Singh)