Following the collapse of China's real estate sector, which accounted for 30% of the country's GDP, China is heading towards recession. Is China about to experience its '2008 crisis'?
What would Mao think of China?
Imagine for a moment the terrible Mao Zedong, founding father of modern China, waking up from his long sleep to observe the Chinese economy today.
No doubt he would have a hard time recognizing his country. Skyscrapers as far as the eye can see, silent electric cars crisscrossing the streets, and delivery robots distributing instant noodles to the four corners of the megacities. THE ” Great Leap Forward » has apparently taken an unexpected turn.
Yet, despite these outward signs of modernity, The Chinese economy is going through a period of turbulence. And not the least!
How is China really doing?
Official figures, usually as smooth as tofu, struggle to mask the reality of the slowdown. GDP growth in the second quarter of 2024 reached only 3.2%a figure that would make many Western economies green with envy, but which is indeed far from the ambitious goals of the Chinese government.
Retail sales are stagnating, as if the Chinese had suddenly decided to a consumer strike.
But the figure that really gives Chinese leaders the shivers is youth unemployment rate jumped to 21%.
One in five young people unemployed!
The Chinese stock market, for its part, seems to have caught a serious cold. The CSI 300 index has lost nearly 7% since the beginning of the year.heading for a fourth consecutive year of decline. Even as global markets recover.
What is the origin of these evils?
The bursting of the housing bubble, which began in 2021, plays the role of the villain in this story. The sector, which represented nearly 30% of China's GDP (yes, you read that right, 30%!), collapsed following government restrictions.
The goal was laudable: to limit the debt of developers who built entire cities for ghost inhabitants. Result: hundreds of construction sites at a standstill and cranes taking a nap, while many companies in the sector play a game of “who will go bankrupt first?”
What was Xi Jinping's response to this monumental crisis? Redirecting resources from real estate to advanced manufacturing.
Exit empty apartments, make way for “new productive forces”! Electric vehicles, batteries, bioproduction, drones… Xi dreams of a China high-techa creator of high-productivity jobs and self-sufficient in the face of American pressure.
China heading for recession
All the signs of a recession are present in China. Inflation has been in negative territory for several months. Nominal interest rates are also falling, a sign that No one really believes in a quick recovery anymore.
The real estate crisis has weakened China's aggregate demand for several reasons. First, It has weakened the country's banking system. Many local banks have lent astronomical sums to “local government financing vehicles,” entities with barbaric names created to finance infrastructure.
These loans, guaranteed by the value of the land, have become extremely risky. Result : Weakened banks are reducing the granting of new credits.
Secondly, the negative wealth effect pushes households to save. Real estate used to be the main asset of the Chinese. Its depreciation makes them more cautious in their spending. In addition, many savers have invested in wealth management products backed by real estate, the value of which is collapsing.
Finally, deflation exacerbates the debt problem. With incomes and prices falling, the real burden of repayments is increasing. It's as if your salary were reduced but your rent remained the same. This pushes households and businesses to further reduce their spending, fueling a vicious deflationary circle.
Towards recovery policies to avoid the crash?
Faced with this worrying situation, most economists are calling for a massive recovery plan focused on consumption. Basically, they would like theThe Chinese government is playing Santa Claus and handing out yuan left, right and centre to encourage people to consume.
But the central government is hesitant to take the step.
Another option would be to address the root causes of weak demand. This would involve bail out the banks to clean up their balance sheets and revive credit. Here again, Chinese leaders seem reluctant, perhaps for fear of setting a precedent or publicly admitting the scale of the problem.
Yet it was the combination of stimulus and bank bailouts that allowed the United States to avoid a decade of recession after the 2008 crisis..
Contrary to pessimistic forecasts that predicted a new Great Depression, the American economy has returned to asolid growth from 2012.
Xi Jinping and his supporters believe they can micromanage the economy to overcome any obstacle. It’s a bit like a conductor thinking he can control every note played by every musician. But history teaches us that macroeconomics does not behave that way. By refusing to roll out a stimulus plan, China risks learning this the hard way.
A worrying demographic aging in China
The challenge is all the greater as the population is aging rapidly. Middle-aged Chinese are saving heavily for retirementaware that they will not be able to count on the support of their only child.
The one-child policy, while helping to control population growth, is now backfiring on China's economy. But the savings of future retirees, mainly invested in real estate, are melting like snow in the sun.These poor Chinese, who thought they had savings for their retirement, are now seeing them dwindle…
In this context, a consumption recovery plan of considerable magnitude would be needed. Imagine having to convince millions of Chinese worried about their retirement to spend their money rather than save it. A challenge that the Chinese government does not seem ready to take up for the moment.
Unless there is a radical change in economic policy, China could therefore experience a long period of sluggish growth.
The consequences would be major, both for the global economy and for the political stability of the regime.. Learning that the world's second-largest economy is going off the rails is rarely good news…
Time is running out for Xi Jinping if he wants to prevent his “Chinese Dream” from turning into an economic nightmare. The eyes of the world are fixed on China’s economic turmoil. If the country does not recover and continues to sink into recession, the entire global economy risks going down with it.
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