In most countries, GDP is a measure of the output delivered by economic actors over a specified period, whereas in China GDP is an input determined politically at the beginning of a time period. China’s Financial DeteriorationĪt the heart of this credit-deterioration process is the way in which the form and structure of economy activity in China has evolved over the past ten to twenty years. Until the systemic problem is addressed and resolved, there can be no permanent stabilization of China’s property market or of its economy more generally. In the medium term, property prices will continue to decline, and insolvencies will keep on emerging. This means, among other things, that even if the property market recovers next year as a consequence of the end of pandemic lockdowns, the recovery can only be partial and temporary. They are far more likely to be part of a systemic problem that has been brewing in China’s economy for more than a decade. Because these events seem to be happening regularly, and with rising breadth and magnitude, it should be clear that they are not isolated events that can be blamed on the various triggers that set them off. The Baoshang case was followed by interventions or investigations involving several other institutions, including banks, shadow banks, property developers, local governments, homebuyers, and other overextended borrowers. A little over a year later, Baoshang became the first Chinese bank to be shut down since Shantou Commercial Bank closed shop in 2001. It was just the most recent in the country’s latest string of notable financial events, which can be said to have started back in May 2019 with the intervention in Baoshang Bank. Long-fearful of being outpaced by China, “economies from the US to South Korea need not look over their shoulders so much”.After discussing the troubled rural banks in Henan in my previous post, it is important to note that what happened in Henan was not the first adverse credit event to hit the Chinese financial system. Crackdowns on top technology innovators haven’t helped, says William Pesek in Nikkei Asia. skewed pattern of production and heavy debts” they were bequeathed by that stimulus they seem “resigned to a slowing economy”. Leaders don’t want a repeat of the “excess capacity. While China has enacted modest stimulus measures, they are nothing on the scale of Beijing’s “torrential” post-2008 pump-priming, says The Economist. The bank doesn’t think China will begin easing the curbs until the middle of next year. Goldman Sachs estimates that cities accounting for roughly 25% of GDP are currently under some form of Covid restrictions, says Stella Yifan Xie in The Wall Street Journal. Some investors had been betting that health measures would be eased after this month’s “all-important Communist Party congress”, where president Xi Jinping is set to secure a third term, but recent pronouncements from officials mean those hopes have “fizzled away”, says Brown. The CSI 300 stock index has fallen by 22% this year. “Last quarter, firms told us they would not invest, borrow, or hire until their Covid-zero nightmare was over,” says research firm China Beige Book. The property slump has been exacerbated by the threat of more Covid-19 lockdowns. Sales in the housing market dropped by 30% year on year in the first eight months of 2022. That means that China’s growth looks set to “be weaker than the rest of the Asian-Pacific region for the first time in three decades”. The World Bank has downgraded its 2022 China growth outlook from 5% to 2.8%, says Tanner Brown in Barron’s. China’s economy has been paralysed by Covid-19 Yet there are signs that exports are now weakening as gloomy consumers in Europe and North America tighten their belts. An export boom helped China ride out the worst of the 2020 pandemic slump trade has also “been one of China’s few bright spots over the past year”, with net exports accounting for a chunky 36% of growth in the first half of 2022. Relatively tight monetary policy and large trade surpluses had spared the yuan from the worst effects of the dollar’s dominance this year, says Nathaniel Taplin in The Wall Street Journal.
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