There are more troubles on the horizon for China’s economy
In some ways, China reminds me of the Soviet Union in the last decade of its existence. On the one hand, thanks to the monolithic nature of its socialist structure, it looked like an unbeatable behemoth. On the other hand, it collapsed as quickly as a punctured balloon, for it was nothing but a Potemkin Village, with a snazzy, modern front hiding a broken system. China, having launched COVID on the world, may be in the balloon-puncturing phase of its existence, and nowhere is that more clear than in the real estate sector.
If you want a little background about the systemic problems in China, I again recommend Ben Shapiro’s video about China because it’s a clear, accessible explanation of the primary issues, everything from demographic implosions to a lack of innovation to debt problems and more.
One of the major problems in the Chinese economy, and Shapiro includes this in his analysis, is the real estate bubble that has been deflating for a long time. Wealthy Chinese people have parked their money in real estate, much as wealthy Americans parked their money in the stock market during the Obama years. There wasn’t any real productivity, but it seemed like a safe place.
Image: Ghost real estate development in China. YouTube screen grab.
The problem in China is that everything from demographic decline, to debt, to fallout from COVID, to bureaucratic interference, to China’s practice of shoddy work, has meant that the real estate market was a bubble unlike anything seen even in America. There are currently an estimated 65 million vacant properties.
For several years, people have been noting that China’s Evergrande, its major real estate company, was in steep decline. Last week, Evergrande finally did the inevitable and filed for bankruptcy protection. This is not going to be a restructuring. It will be, instead, a way to provide a decent dismemberment of the corpse with some level of protection for the shareholders.
Meanwhile, China’s second-largest real estate company, Country Garden, is also failing. Dominic Pino explains the problem:
Its bonds are currently trading at less than 10 percent of their face value, and the company said this morning it is trying to extend the maturity date on a $537 million payment due on September 2. Bloomberg reports that Country Garden “had 1.4 trillion yuan of total liabilities at the end of last year. To put that figure in perspective, it exceeds the annual economic output of a long list of countries including Kuwait.” The firm has four times as many projects as China Evergrande Group, which is itself a massive property developer and defaulted on its debts at the end of 2021.
Country Garden’s sales were down 34 percent year-over-year in July, and the company missed a major bond payment this month. “Even if Country Garden makes the late payment, it would only be delaying what appears to be inevitable,” reports the Financial Times. According to Morgan Stanley analysis, the company is burning 3–4 billion yuan in cash each month just to stay afloat. Its exposure is worse than that of other property developers because many of its projects are in third-tier cities, some of which are sitting largely empty as a result of central-planning errors.
The fact that China has deep, ultimately catastrophic systemic problems is a mixed blessing. On the one hand, given that it’s America’s major geopolitical opponent, one cannot help but be grateful that it’s getting weaker, not stronger. On the other hand, there are few more dangerous things than an animal engaged in a last-ditch battle against its imminent demise because sometimes that battle is successful. The same is true for a powerful nation.
In addition, thanks to decades of bad American policies, America’s economy is inextricably intertwined with China’s. If China goes down, there’s a tremendous risk that we go down, too.
There really is no good scenario here. The best case is for us to disentangle ourselves economically from China while shoring up our defenses (including hardening our infrastructure). The fact is that we’re not in much better shape economically than China and we’re in socially worse shape (which China has been encouraging). As with an epic battle between a python and an alligator, both sometimes lose.