It “wouldn’t be credible” for the UK to stop cooperating with China. In his recent trip to Beijing, the Foreign Secretary James Cleverly made this statement. This was the first high-level British visit in five years.
China is the UK’s fourth-largest trading partner, with combined trade between the two countries reaching £107.5 billion in the year ending in March 2023, an increase of 11% from the previous 12 months.
Even if there were other reasons for conflict between London and Beijing, such as concerns over civil freedoms in Hong Kong, China’s continued backing for Russia, and, of course, rising espionage fears, these deeper trade relationships were destroyed. A Westminster parliamentary assistant who was detained on suspicion of spying for China was just recently made public.
But in terms of economics, China has long been the main driver of world growth. Its GDP increased 9–10 percent annually from the middle of the 1980s to 2010 and then another 7-8 percent annually till 2019.
The People’s Republic went from being an economic backwater to a commercial behemoth, contributing 18–20% of the global GDP, thanks to this astounding growth spurt. No matter the political ups and downs in relations with the West, China has recently made a much larger contribution to global growth than the US.
However, the second-largest economy in the world is currently in trouble and has been since it emerged from last year’s extraordinarily strict lockdowns. In August, China’s inflation rate was only 0.1 percent, having recently fallen below zero and into deflationary zone due to a decline in consumer confidence and an excess of produced products.
The decline in credit demand among Chinese businesses and families accelerated in July. Due to the Western world’s rising cost of living, exports are down 15% year over year. Beijing has also stopped providing statistics on youth unemployment after the unemployment rate for those between the ages of 16 and 24 reached 20%.
Some claim that the Chinese economy is experiencing extended Covid, with growth expected to reach just 3% in 2022 and 5.2 % this year. These are poor growth rates for China, while they are more than respectable elsewhere. And this is leading to worries that the People’s Republic will stop being a significant growth engine, which would lead to a decline in the global economy.
Recently, these worries have started to come into focus. Over the past few weeks, Hong Kong’s Hang Seng Index, which is down more than 20% from its top in January, has entered “bear market” territory. Recently, the yuan’s value against the dollar reached a 16-year low, which prompted the central bank to spend extensively to support the currency.
All eyes are now focused on China’s enormous real estate market, which accounts for 25 to 30 percent of the country’s GDP and is a significant economic driver given the scope of the construction and related services involved. But the recent real estate slump has caused some major developers to fall following years of rapid growth supported by local government and private-sector debt.
The world’s largest real estate company, Country Garden, is on the verge of bankruptcy, and Evergrande, which is deeply indebted, has just done the same in the US. The second-largest economy in the world has stalled as a result of warnings the property bubble may collapse, as about 70% of family wealth is tied to real estate. And many have taken notice of this because China’s problems are currently dominating financial markets all around the world.
China introduced the greatest stimulus program in history during the 2008 global financial crisis, and under Hu Jintao, it was the first significant economy to recover from the crisis. Contrarily, President Xi has been hesitant to implement significant budgetary rescue measures.
The fact that the government debt has skyrocketed past 140 percent of GDP, much of it at the local government level, is one factor. As a result of the Bank of China lowering interest rates, the authorities have instead implemented waves of modest steps to increase demand, such as easing the requirements for mortgages.
Last week, I read a research note asserting that China’s current situation is “100 times worse than Lehman,” posing a significantly larger threat to global stability than the US banking and real estate sectors did prior to the 2008 financial crisis.
I’m not certain. Prior to 2008, the US real estate market was thriving, with many properties sold for down payments of just 5% or less. As a result, a large number of distressed sellers who couldn’t pay their mortgages appeared as an overpriced market began to flip. As a result, prices fell even further, sending them into a vicious spiral.
In large cities, China’s lending regulations often set the minimum down payment at 30–40 percent for first-time purchasers, and 80 percent for investors. This suggests that the residential real estate market is less fragile than the US market was in 2008. Even though the regulations have lately been loosened in an effort to foster greater confidence, first-time buyers and investors still need to make very onerous 20–40% down payments.
In my opinion, a protracted period of slow growth is more plausible than a collapse in China similar to the one that occurred in 2008. People have linked China’s economic difficulties to those of Japan in the early 1990s, when that country’s enormous asset bubble burst and led to a protracted cycle of deflation and, at best, tepid economic expansion.
At the time, Japan had the second-largest economy in the world and was, like China, a major exporter of consumer electronics and automobiles. However, Japan entered a period of stagnation known as the “lost decades” when real estate prices declined in the early 1990s.
That won’t happen in China, in my opinion. China, which has plenty of opportunity to expand and is still considered to be a “middle-income” nation in terms of GDP per capita, is far from becoming as wealthy as Japan was thirty or so years ago. As China’s interest rates are about 3.5 percent, they have more room to cut than Japan had during the crisis.
In addition, China’s residential and commercial property is less “levered” than it was in 2008 America. China is still developing, albeit slowly compared to the mega-expansion of the preceding decades but quickly compared to virtually all other major countries.
I think it’s premature to suggest that a Chinese collapse would cause a shakeup in world markets. Contrarily, despite our political differences, the Western world is currently benefited by China’s downturn.
Crude prices, which are currently hovering around $90 per barrel, would be considerably north of $100 per barrel if China were booming and consuming millions more barrels of oil every day. And if we want to avoid inflation and this horrifying cost-of-living problem, we should embrace rather than worry signals of moderate deflation in China, which would result in much cheaper exports to the West.
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