The economic slowdown in China, the world’s second largest economy, has global implications. Inside the country, the population is already feeling the transformation from the “economic miracle” of the Chinese giant to the disastrous consequences of unsustainable real estate growth, exacerbated by the Covid Zero policy in the country. The middle class, in particular, is paying dearly for these strategies of the Chinese dictatorship.
At the end of July, there was a strong conflict involving Chinese regional banks, with confiscated money and war tanks at the doors of the branches, to prevent the entry of protesters who for three months asked to withdraw savings from the accounts. The measure was adopted in Henan province, where protests by account holders in the city of Zhengzhou were violently suppressed.
Account holders at four regional banks claimed that their savings had been blocked since April. These amounts would be being transferred to “investment products”, according to Chinese authorities.
To stop the demonstrations of account holders, the Chinese dictatorship would still have manipulated the population identification platform, marking people as if they had tested positive for Covid-19 or had been in contact with infected people. According to complaints made by the protesters, dozens of them would be in “red” in the app used in the country, being prevented from leaving the house.
On August 29, Henan police announced the arrest of 234 people, “members of a criminal organization”, as the corporation announced. They would be involved in a “financial embezzlement” of the four Chinese banks in crisis.
The real estate bubble
Based on property and credit, China achieved an average gross domestic product (GDP) growth of 10% per year between 1991 and 2010, higher than any other country in the same period. This development made the Asian country stand out for what became known as the “Chinese rate of growth”. In this context, private sector credit grew more than the equivalent of 100% of GDP.
This pace was higher than that preceding Japan’s “lost decade” in 1980 and the US market bubble in 2007, as recalls Desmond Lachman, a fellow at the American Business Institute, former deputy director of the Department for Development and Review of International Monetary Fund Policies, in an article published in the American newspaper National Review.
The real estate sector represents more than 30% of the country’s economy – twice the size of the same sector in the United States, as Lachman points out, and involves Chinese subnational entities, contractors and investment vehicles.
“There are now many indications that China’s housing market party is coming to an end,” highlighted the National Review columnist. The main factor for this conclusion is the situation of the construction company Evergrande, which has a billion dollar debt (US$ 300 billion, R$ 1.65 trillion in the current conversion). The company stopped paying its bonds in dollars last year and does not hide the possibility of defaulting.
Then, another 20 developers in the Chinese real estate market followed suit. In July, China urged banks to extend more credit to companies struggling with a growing number of homeowners refusing to pay monthly fees for overdue works.
Off-plan pre-sales are the most common way to “sell” real estate in China. The verb is in quotation marks, because in the country there is no real sale of houses or apartments, but a 70-year lease of properties that belong to the provinces.
More than 1 million Chinese families have joined the boycott of mortgage payments for unfinished works. With defaulted loans, banks are saddled. Meanwhile, 65 million homes are unoccupied in the country. As Frédéric Lemaître, correspondent for Le Figaro in Beijing, pointed out, “in most Chinese cities, prices have reached a level that no longer allows the middle class to find housing”.
Covid Zero
Compounding this crisis stemming from the real estate sector, another strategic mistake in China: for two and a half years, the country has surrounded neighborhoods and even entire cities when outbreaks of Covid-19 are detected.
The exaggerated confinements directly harmed the economy of 45 major Chinese cities, including Shanghai. Three hundred and seventy-three million inhabitants were impacted, which is equivalent to a quarter of the country’s population and 40% of the national GDP, according to the Japanese financial holding company Nomura, especially affecting the country’s middle class.
As a result, the growth of the Chinese economy is expected to fall to 3% in 2022, as predicted by research by the American Rhodium Group. In 2019, the percentage was 6%. “Risks, complexity and uncertainty about China’s economic development have increased,” the group said in a note.
A study published by the French bank Natixis presented the estimate that, in the third quarter of this year, the growth of the Chinese economy will be close to zero. The cause, according to the bank, is the restrictive measures in the face of the pandemic. And the trend is for the slowdown to continue, because Covid Zero was announced by the Chinese dictatorship as a policy that should last until 2027.
In the long periods of lockdown, as announced by the National Statistics Office, dozens of companies had to reduce or stop production. “Their functioning was severely hampered,” said the organization’s chief analyst, Zhao Qinghe, in the statement.
In April, the value added in the industry fell by 2.9% in one year. Retail had a drop of 11% and car sales had a negative impact of 47%. Specifically in the real estate sector, according to E-House, China Research and Development Institute, sales fell by 52% in the first months of 2022 compared to last year.
worldwide consequences
If the scenario of economic slowdown continues, the world will no longer be able to count on China as its main engine of economic growth. Emerging market economies will no longer be able to save themselves from another China-driven international commodity boom, as they were in the 2008 Crisis.
Ren Zhengfei, founder of Chinese telecom giant Huawei, recently warned the multinational’s salaried employees at an internal event: “The next decade will be a very painful period in human history.” The speech was criticized by the Chinese Communist Party, which is preparing the 20th congress, where Xi Jinping is expected to announce his third term, trying to maintain the appearance of vitality of the “Chinese dream” and the “pace of growth” that, according to the facts, stayed in the past.
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