The Troubled State of China’s Economy: Nowhere to Grow


The Chinese economy does not appear to be returning to growth mode anytime soon. Real estate development, which has long been the engine of the economy, sank with the bursting of the real estate bubble. Quantitative monetary expansion is essential, but it is impossible because China’s foreign currency reserves, which underpin the issuance of yuan, are not growing. An impatient president, Xi Jinping, is increasingly relying on an intransigent attitude towards Taiwan.

A short video powered by WeChat, a smartphone app from China, sent Chinese young people into a frenzy on the night of August 2. The image of SPAR 19, the flight carrying US dignitaries including Nancy Pelosi, Speaker of the US House of Representatives, was streamed in real time as it flew from Malaysia to Taipei.

The image also showed the shadow of a Chinese military aircraft following her. Viewers became excited enough to call for Pelosi’s plane to be shot down. In China’s urban areas, the average unemployment rate for 16-24 year olds continues to rise, reaching 19.3% in June. It is easy to divert their attention to problems outside the country as an outlet for their discontent.

Telling the story in data

Let’s look at the graph provided. The chart shows China’s three-month GDP (in real terms), real estate development investment, house prices (national basis) and cement production (six-month totals to the end of each period ).

These four economic indicators are superimposed on the foreign exchange reserves and the issuance of yuan from the People’s Bank of China. The highs and lows of the four economic indicators move synchronously. This is a phenomenon specific to the economy of mainland China.

Under the guise of “people’s property”, land in China is allocated by local governments controlled by members of the Chinese Communist Party (CCP) who represent the people, and property is sold to property developers.

Chinese Communist Party bureaucrats hold key positions in the People’s Bank of China and state-owned commercial banks, both of which control the issuance and distribution of money. The local government operates the “Rongzi Pingtai” (Investment Platform), a finance and loan agency for real estate development.

In short, it was easy to try to grow the economy because the CCP oversees all land and loan money. Under the command of the Chinese Communist Party, all sites, including forested fields, farmlands, old urban areas and cemeteries, are to be razed, leveled and then improved with cement structures. In other words, the creation of fixed assets. Money would flow in abundance under the CCP’s mandate.

China’s economic reliance on fixed assets stands out from that of other countries. The country’s investment in fixed assets has represented more than 40% of GDP for many years. By comparison, Japan is around 25%, the US around 18% and Europe just over 20%.

Burst the Chinese housing bubble

Capital investments include not only condominiums and commercial buildings, but also factories and other industrial facilities. Infrastructure such as highways and airports are also included. Infrastructure development in China has advanced significantly in recent years, and investment in real estate development has been the main driver of GDP.

China would have us believe that it can print as many yuan as it wants and continue its rapid economic growth driven by real estate investment if the Chinese Communist Party is so willing. But those days are over.

As the decline in house prices on the chart indicates, the real estate bubble is about to burst. The market is saturated, as many middle-class people in Shanghai and other major cities have already purchased their second and third condominiums. With uncertainty over pensions and other social security benefits, accumulating wealth through real estate assets has been more popular with this same middle class.

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Moreover, the Chinese population is aging at a rapid pace. The ratio of working-age people aged 15-59 to people aged 60 and over is 3.4 people in 2021, a sharp drop from 5.1 people a decade ago. By 2027, it is likely to drop much further, to less than 2.

As the working-age population declines, the demand for new homes will also continue to decline.

The fiscal policy problem

There is a more critical issue: the fiscal and monetary aspects of the yuan. On July 19, Chinese Premier Li Keqiang told an online meeting of the World Economic Forum that “we will not implement major stimulus packages or policies aimed at excessively supplying foreign exchange to achieve a target of growth too high.

As the chart shows, the real economic growth rate fell to 0.4% year-on-year in the April-June period of this year. Achieving the growth target of around 5.5% for this year seems out of reach.

Usually, the central Party government would set the growth rate target at the end of the previous year, adopt it as government policy in the National People’s Congress the following year, and then mobilize funds to achieve the target. . However, Premier Li did not do that this time. Sometimes you can’t do something even if you want to.

As we have pointed out several times in this column, the issuance of funds by China is based on the foreign exchange reserves of the People’s Bank of China (equivalent to foreign exchange reserves). As the chart shows, foreign exchange reserves have barely increased. Therefore, the issuance of new renminbi should be restricted.

China has rushed to attract foreign investment in securities to supplement its missing foreign exchange reserves. However, since Russia’s invasion of Ukraine, foreign investment in China has declined. Moreover, if Chinese troops invaded Taiwan, the United States would likely impose financial sanctions on China and no foreign currency would flow into China.

This chart suggests that a Taiwanese contingency coupled with the long-term stagnation of the Chinese economy would be the downfall of Xi Jinping.


(Read this article in Japanese on this link.)

Author: Hideo Tamura


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