For several years now, economists and financial analysts from banks and stock exchanges around the world have been following the slow, but inexorable loss of air from the Chinese real estate bubble. Everyone was watching the phenomenon like someone watching a pot of milk on the fire to prevent it from boiling over, as described this weekend by French China expert Ursula Gauthier in the Parisian weekly L’Obs.
Even before the pandemic, it became clear that something was wrong in new home sales in the Asian giant, that in the last three decades had boosted the Chinese economy at an astonishing rate of 15 million new residences every year.
But since the decline in numbers was not accelerated, many expected a soft landing for a sector that, by itself, generated 15 percent of the Eastern power’s GDP. Starting in mid-2022 and even more so this year, cConstruction companies such as Evergrande and Country Garden, giants of the industry in China, were exposed with financial gaps that are worth hundreds of billions of dollars.
In August, Evergrande’s stock lost 90 percent of its value on the Hong Kong stock exchange, while Country Garden lost about $7 billion in the first half of this year. According to the Spanish newspaper El Mundo, a calculation by the consulting firm Capital Economics, based in London, estimated that In China there are more than 100 million new homes that are empty.
The boiling milk finally spilled out. Gone are the times when demand swallowed up any new residence that came on the market, even before it was built. Thousands of construction firms are drowning in their debts and many of them have stopped paying banks.as happens with millions of families.
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The entire Chinese economy suffers the consequences: after more than 30 years of growing at rates greater than 8 percent annually, GDP growth is likely to barely exceed 4 percent in 2023.
The whole world is going to suffer. In the last decade, China was responsible for 40 percent of global economic growth, much more than the United States and Europe combined. The Chinese locomotive has not stopped suddenly, but it is moving at half the speed it was traveling at.
The issue is not merely economic. On the one hand, there is a loss of confidence among foreign investors in China who, according to Bloomberg, have withdrawn more than $10 billion from the Asian giant’s stock markets in a few months, largely because, apart from the economic problems, They do not feel comfortable with the authoritarian drift of President Xi Jinping’s government.
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As Xi Jinping also appears authoritarian in the eyes of investors, many European and American companies are now afraid of being exposed
“Vladimir Putin’s authoritarianism and expansionist pretensions led Russia to the war in Ukraine and the collapse of its economy, with enormous costs for Western companies that had invested in that country,” says an analysis document circulating in the ministries. of European finances. “And since in the eyes of investors, Xi Jinping also appears authoritarian and expansionist,” the report adds, “now many European and American companies are afraid of being exposed in China in the near future.”
The other political effect is that, for decades, Beijing has committed billions of dollars in investments, bond purchases and financial cooperation in developing nations in Asia, Africa and Latin America, which has triggered its political influence. If the lean times come, will this checkbook influence model be sustainable?
The figures of the disaster in China
It is not just about the weight of housing construction in the Chinese economy, which is around 15 percent of GDP. The effect goes further: by adding the sectors that depend on the housing market, such as the production of steel, cement, glass, appliances and furniture, More than 30 percent of the country’s GDP is hit.
A good example of nervous Western multinationals is the Swedish Ikea. After 24 years of constant growth in China, The powerful Swedish furniture and home furnishings chain has begun to close stores in some cities, because customers have decreased dramatically.
Analyst Gauthier summarizes the dimensions of the disaster like this: “For 30 years, the real estate sector only knew one trend: continuous rise. First, with a spectacular boom of more than two decades and then, since 2018, with a gradual slowdown. Suddenly, in 2022, a brutal drop came: house prices fell 30 percent in one year (even more than in the 2008 financial crisis in the West), sales plummeted 40 percent, and new construction fell 45 percent. percent”.
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Hundreds of videos on social networks show enormous apartment towers in black work, in the process of demolition, because after years of suspension of the works, and exposed to inclement weather, they are no longer safe and what is imposed is to dynamite them.
Lucas de la Cal, correspondent for El Mundo, from Madrid to Shanghai, and a great expert on the Chinese economy, explains that The real estate crisis comes at a time when many other problems are piling up, such as youth unemployment. In the range between 16 and 24 years old, unemployment reaches 21.3 percent, just at a time when 11.6 million young people (a record) have just finished their university education and have gone out to look for work in a labor market in intensive care.
Low growth, decline in exports, fall in foreign investment, are concepts that have never been associated with the Chinese economy in thirty years. But today they are on the problem board of the Xi regime, which, in 2021 when the problems began, did not hesitate to go out and rescue giants like Evergrande, whose liabilities of more than $300 billion are equivalent to the GDP of a country like Greece.
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The real estate crisis comes at a time when many other problems are piling up.
In all this, the pandemic played an important role. Local governments, which at another time would have been able to direct their funds to support housing construction and infrastructure, with investments to revive these activities, have exhausted their coffers.
They spent hundreds of millions of yuan on the failed zero covid strategy promoted from Beijing, which involved closing entire cities for weeks, with enormous costs in terms of surveillance and control, visits by medical personnel, vaccination, construction and provision of gigantic centers to confine those infected, and all this with commercial and business activities paralyzed.
The economic crisis threatens to become a social crisis and, eventually, a political crisis. In a movement that has gained momentum thanks to social networks, thousands of indebted families who have not been given their apartment have decided to stop paying their credit installments in protest. Others have decided to move into their unfinished residences, without windows or cleaning services.
The strike of debtors who stop paying their dues to the banks because the builders went bankrupt and did not deliver their homes, endangers the entire financial system. Furthermore, it can lead to mobilizations and protests in dozens of cities. Perhaps President Joe Biden was not exaggerating when, a few weeks ago, he declared: “The Chinese economy is a time bomb.”
The Chinese sneeze
Nearly a century ago, when the New York stock market collapsed and the shock produced a global recession, the phrase became popular according to which “When America sneezes, the world gets the flu.” Today the same can be said, but about China, whose economic boom has been the engine of the world economy for three decades.
Analysts and experts from private banks agree that the Chinese economy will grow less than 5 percent in 2023. This is not a pause, but rather a paradigm shift that will lead to the eastern power does not grow again in a sustained manner at rates higher than 8 percent annually, as happened during the first two decades of the century. Instead, it is expected to tend to stabilize the annual increase in its GDP at around 3 percent or 4 percent between now and 2030.
That will imply less impulse to purchases of oil, coal, gas, copper and food. In copper alone, China consumes 56 percent of world production. But there will also be lower imports of cars, which will especially affect Germany, South Korea and Japan, the main suppliers to the Chinese market.
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China is also likely to stop buying debt bonds from Third World countries, and that hits those who are most dependent on these funds, as is the case of Argentina and Venezuela.
Colombia is also hit. A little more than 30 years ago, in 1991, the country exported 17 million dollars to China, and imported 8 million from there, insignificant figures compared to what came later. In 2019, Colombian exports to that country set a record of 4,564 million dollars.
Due to the pandemic, Colombian sales slowed to reach 2,165 million in 2022. Many expected that in 2023, once Beijing abandoned the zero covid policy and the cities resumed their activity, there would be a reactivation.
But the figures for the first half of the year indicate that there will be no improvement and that there may even be a slight additional drop compared to 2022. For now, it does not seem that the record level reached in 2019 will be repeated in the coming years. The Chinese sneeze is also felt in Colombia.
MAURICIO VARGAS LINARES
ANALYSIS FOR TIME
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