"Everything's just fine" - China's economy vs reality
China’s economy seems to be giving off warning signs, but the government is acting as if everything is running as normal. Is the CCP’s version of events true?
Footage has recently emerged of account holders in front of Zhengzhou People’s Bank of China holding protests that eventually turned violent. Many suspect that the instigators of the violence were sent in by the CCP, as they’ve used such tactics in the past, partly to break up protests, and partly to pin the blame on organisers so they have an excuse to lock them up.
Meanwhile, China Daily reports that the economy has grown 2.5% year-on-year in the first half of 2022, exports surged 13.2% in the first half, and consumption ended a three-month decline to grow 3.1% in June.
China’s property market is going to crash.
Mortgage owners are defaulting.
The State Council is handing out stimulus packages.
China is building new chip factories.
The list of stories being put out on China’s economy recently is almost endless. They range from the world-ending to the almost imperceptible, and they seem to be coming thick and fast.
Clearly there are two competing narratives: on the one hand, the Chinese economy is in dire trouble – on the verge of collapse even – and on the other hand, the Chinese economy is set for record growth. It’s impossible to tell just from news stories which one is correct. Apart from clear bias from both sides, we’re also dealing with a lot of propaganda, and I’m not just talking about the CCP. There are many who want to inspire fear that the economy will collapse, possibly in the hopes they can trigger it.
So what can we learn from these stories? Maybe they are a warning sign, a portent of things to come. Maybe they are just noise, chatter from the never-ending black pit of internet scrolling. Maybe it’s just the regular rumblings of every major economy. Maybe it’s just a sign that I spend too much time reading about China, and need more sleep. We’re all suffering right now, especially in the UK, where the crisis has gotten to the point where we’ve had to depose our own leader.
I suppose the question is, could it get that bad in China?
Cause for concern
Much has been made about the latest property scandal, which ranges well beyond the reported 150 mortgage defaulters who are refusing to pay any more for their presold homes unless they’re completed. According to one source, “since 2019, more than $ 5 trillion worth of apartments have been sold through presale. Even assuming only 5% of these projects can’t be completed, total value at risk is $250 billion.” The only way to restart delayed projects is through financial injection, invariably from the government, which may cost them over $4bn. If the government doesn’t bail them out, people will stop prebuying, which will lead to the collapse of many of these companies. Other China watchers believe there could also be knock-on effects on China’s bond market, and economy as a whole.
There’s also risk of a huge amount of wealth leaving the country. Apparently 10,000 Chinese nationals want to leave the country, taking around $48bn with them. Experts are questioning whether they’ll be allowed to leave, as artificial stopgaps are being put in place to slow them down, such as an increase in passport processing times. Enquiries to move people and their money out of China to places like the US, Singapore, Australia, Canada and places in Europe, have apparently grown 3 to 5 times compared with last year. Some of the people announcing their departure are big names, such as Huang Yimeng, billionaire owner of gaming company XD Inc. But for ordinary people (and even wealthy people) options for converting money, administrative hurdles, even alternative (sometimes shady) options like buying crypto are being shut down one after the other.
But of course the biggest story of the moment is the Henan banking scandal, which saw four local banks cut customers off from billions of yuan in savings since April. An official investigation has been launched, and the government has vowed to pay back savers whose money appears to be squandered in dodgy investments. But this whole affair does not exactly inspire confidence in China’s banking system, especially as local officials had manipulated customer health codes to prevent them from travelling to the banks to protest. As the SCMP points out, “China’s rural banks are often the key financiers for farmers and small businesses in less-developed regions,” making them a cornerstone of the economy. If people can’t trust them, then it amounts to not trusting the local government, and more protests may develop in the future.
Combined, these stories have been flagged as warning signs by China watchers, economists, and political commentators. While China’s economy is not exactly falling to its knees right now, the knock-on effect of these tremors can already be felt in other parts of the economy.
Background noise
Some negative news has broken more quietly, seemingly not picked up in Western press. A huge e-commerce retailer closed up shop after 23 years. Not the biggest deal in the world (businesses close all the time), but interestingly the article on the Global Times states that “eachnet.com's inability to keep up with the times is the fact that it is an entirely acquired company, which did not have the scope for independent business decisions.” The Chinese internet space is fiercely competitive, but suggesting that foreign companies have struggled (and will continue to struggle) in China, without mentioning how the Chinese government controls and influences the market, is remiss. The pandemic was also not mentioned, even though we know spending dropped and supply chains were affected. A small rumble, but a sign nonetheless.
Shanghai workers are struggling to find work if they’ve had a previous case of Covid-19. Not that the lockdowns are over of course. People are still being confined to their homes and/or quarantine centres when a case hits their building, and residents are still unable to leave the city for the most part. Now that the virus seems to be spreading again, and other cities are implementing similar measures to reach the government’s zero-covid goal, it’s possible that labourers and migrant workers in other cities will suffer a similar fate. Considering that China relies on these workers to essentially run their factories, restaurants, and other low-level service jobs, it’s difficult to see how this wouldn’t have a devastating impact on the economy.
The government wants to intervene more in the economy through a variety of stimulus packages. Feed shortages for animals led to pigs starving to death. Factories in Shenzhen have been told to operate on a closed-loop system for at least a week due to a surge in covid cases. Investment in the real estate sector fell by 5.4% in the first half of the year (apparently because China is transitioning “away from real estate-led growth to high-tech- and innovation-driven growth”). All of these stories are relatively small, but they all add up to the same answer. The pandemic has rocked China’s economy, and the people and their businesses are still struggling to get back on their feet.
No big deal
But does this mean the whole economy is about to collapse and the CCP will come crashing down with it? The Chinese media certainly doesn’t think so. In fact, not only are there very few reports of the cases mentioned above, but those that were had a markedly different tone.
Henan is all being dealt with as investors are being paid back, and the government is working to deal with other similar cases in future. According to an investment specialist, “small and medium sized banks are weaker in the areas of corporate governance and risk management. Some shareholders have a huge influence on business operations of some banks," which led to the current situation. But Chinese officials remain optimistic: “Despite the problems, the overall operations of small and midsize banks in China still remain stable, and the overall risk remains controllable.”
While the government is acknowledging the ‘debt-ridden’ state of the real estate sector, things are apparently beginning to stabilise:
Although there have been recent instances of some homebuyers refusing to make mortgage payments due to delayed delivery or stalled construction of their presold homes, their impact on the realty and banking industries would be insignificant as associated financial risks are manageable and under control, experts said.
"Only a very low proportion of property projects in China are experiencing a delivery delay or construction standstill. Homebuyers' refusal to pay mortgage is more of a warning to push property developers to resume construction."
And the news only gets better. The Chinese economy is growing — not the double-digit growth we’ve been used to in the past, but much better than what you’d expect given what’s been going on in the rest of the world. China’s economy is resilient – ‘a bubble that won’t pop’ – and despite the trauma of the pandemic, China has lost “less than most other major economies.”
Smoke and mirrors
It’s possible that Chinese news is right, that all of this is nothing. But the likelihood of there only being 150 mortgage defaulters in the whole country, yet the news still managing to break internationally, seems low to me. I feel like there’s a lot more going on behind the scenes that we don’t know about, other cracks that are yet to show, that the government is still able to keep hidden, for now. Perhaps more signs will emerge after the party’s 20th congress later this year, though few doubt anything like a challenge to Xi Jinping’s leadership.
One sign is obvious: that we’re hearing about any trouble at all. In the past, the CCP was able to keep quite a tight lid on most of the signs of weakness – things like protests, refusal to comply with the law, fraud and corruption. But these stories are becoming more frequent, and more detailed. Within the past year alone, horrific details of the floods that devastated Zhengzhou and the case of Evergrande have rocked international news. The harsh Shanghai lockdowns and stories of creeping effects on its economy continue to emerge. The Chinese people are becoming tired of excuses, pushing back against official narratives, releasing their own information, and less willing to toe the party line.
What remains to be seen is what the party is going to do about it.