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Is the Chinese Economy Unraveling? Insights from Australia
Over the last 15 years, China has been meticulously crafting an economic powerhouse. However, recent indicators suggest that the once stable Chinese economy might be on the brink of unraveling. Ian Verrender, a seasoned business editor, delves into the potential internal detonation threatening China’s economic stability.
### The Unraveling of China’s Economy and Its Impact on Australia
None of the recent economic challenges in China should come as a surprise, given that Beijing had already initiated a downturn even before the global pandemic hit. What has truly shocked both observers and investors is the failure of authorities to address these issues effectively and implement measures to mitigate the economic repercussions.
In October of last year, the Reserve Bank of Australia published a report highlighting the potential risks to global economic growth, with a particular emphasis on Australia, stemming from the ongoing crisis in China’s real estate market. Since then, the situation has only worsened, sparking concerns about potential repercussions on the country’s financial and banking sectors.
Amidst these developments, China’s three primary markets have been experiencing a downward trend since early last year, in stark contrast to the bullish performance of Wall Street. The unfolding economic scenario in China has significant implications not only for its domestic economy but also for countries like Australia, which are closely tied to China’s economic fortunes.
China Economy Unraveling: A Race Against Time
China, much like Australia, relies heavily on property as the primary source of household wealth. However, this wealth is swiftly diminishing due to continuous downturns in both the real estate and stock markets.
Over the last couple of years, housing prices have plummeted by approximately 16%, with the decline gaining momentum in December.
During December, a staggering 62 out of the 70 cities examined experienced decreases in property prices. Sales, measured by floor space, witnessed a 23% drop compared to the previous year, marking the sharpest decline since 2015.
Goldman Sachs, an investment bank, predicts that the market has not yet hit its lowest point.
In their analysis for clients, Goldman Sachs analysts drew parallels between China’s current property crisis and the real estate crash that occurred in the United States in 2008, triggering the global financial crisis.
Impact of China’s Economy Unraveling on Australia
Despite numerous unfinished residential buildings, property prices in China have not yet hit a low point, according to experts. The continuation of a housing downcycle for years is a concern, with efforts to prevent negative consequences being deemed crucial. In the case of China, this includes potential developer defaults and local government spending cuts, similar to the foreclosures and financial stresses experienced in the United States.
One of the significant challenges contributing to this situation is the presence of millions of incomplete apartments that investors have already paid for, creating an overhang in the market and causing construction to come to a halt. This overhang, coupled with a lack of new sales, has put immense pressure on local government authorities that heavily rely on real estate transactions, resulting in debts amounting to approximately $US13 trillion ($19.87 trillion).
Recent efforts by the government to stimulate the economy included a reduction in interest rates to provide developers with much-needed liquidity. However, these measures have not been successful in restoring confidence, especially following the collapse of China Evergrande, a former global real estate giant, and the debt defaults of Country Garden.
China Economy Unraveling Australia
Despite reassurances from the Chinese government, investors remain skeptical in light of Evergrande’s collapse and the broader challenges facing the real estate sector in China.
Stock Market Trends: A Global Perspective
Stock markets across Europe, the United States, and Japan have been soaring to new heights in recent months, setting new records. However, the story in China tells a different tale. Since 2021, Chinese stocks in Shenzhen, Shanghai, and Hong Kong have witnessed a massive outflow of nearly $US7 trillion, resulting in a staggering 40% loss in value.
Investors, including major Australian super funds, are grappling with significant losses, particularly those who entered the market last year in anticipation of a post-COVID economic resurgence. As a result, many have chosen to pull back their investments. Direct foreign investment in China plummeted to its lowest level in over thirty years.
The contrast is evident when looking at the performance of stock markets worldwide. While Japan, Wall Street, and Indian markets have been thriving since early last year, China’s major markets have been experiencing a downturn.
Amidst these fluctuations, concerns about the China economy unraveling have been raised, especially in Australia, as investors navigate the volatile global market landscape.
China’s economy is unraveling in Australia, as its stock market experiences a significant downturn, contrasting with the strong performance seen in other global markets. Even Vanguard, a prominent global funds manager known for pioneering passive Exchange Traded Funds, has decided to pull out of China amidst these challenging times. This move has notably benefited Japan, as investors have shifted their focus to the Tokyo market, which recently broke a 34-year record set in 1989.
The situation in China has been dire for its 220 million stock market investors, who are facing financial turmoil exacerbated by declining real estate values. Consequently, Chinese consumers are opting to save rather than spend, with excess savings on the rise in the December quarter alongside a decrease in consumer prices. The repercussions of China’s plunging stock market are far-reaching, impacting millions of investors and creating economic uncertainty both domestically and internationally.
Understanding the Unraveling of the Chinese Economy
In many aspects, the economic downturn in China can be attributed to self-inflicted actions.
Prior to the impact of COVID-19 and the extensive lockdown measures that led to the country’s isolation, Beijing initiated conflicts with its largest and most influential corporations.
Before confronting tech tycoons like Jack Ma from Alibaba and disrupting the private education industry, the government had already targeted real estate tycoons.
President Xi Jinping’s statement, emphasizing that “houses should be used for living, not for speculation,” was an attempt to cool down the overheated housing market, and it indeed had a significant effect.
Stringent debt regulations, referred to as the three red lines, were implemented, severely restricting the operations of developers.
Focusing on its real estate sector, China’s economic downturn appears to be self-inflicted. Beijing has toned down its talk on property investment but has not implemented effective measures to halt the decline.
Global Impact of Evergrande’s Liquidation on China Economy, Unraveling Australia
Evergrande Group, one of China’s largest property developers, has been ordered by a Hong Kong court to liquidate. This decision has the potential to create significant repercussions, not only within China but also on a global scale, affecting economies such as Australia.
China’s economic unraveling has sparked concerns about the stability of its financial system, particularly the shadow banking sector, which has attracted a significant number of local investors. The default of a prominent shadow group, Zhongrong International Trust, has raised alarms about the potential repercussions on the broader financial landscape. According to a recent study by the RBA, the shadow banking industry in China poses a risk due to its lack of regulation, insufficient capitalization, and interconnectedness with traditional financial institutions, such as banks.
To address these challenges, one proposed solution involves the Chinese government assuming control of struggling real estate firms. In a bid to stabilize the situation, state-owned entities have been directed to infuse capital into the stock markets. This approach aligns with China’s “common prosperity” ideology; however, the actions taken thus far have been cautious and tentative.
