Person of the week: Xi Jinping
Four reasons why China is threatened with a crash
By Wolfram Weimer
06/20/2023, 11:24 am
Plunging exports, a real estate crisis and weak consumption are slowing down China’s growth. Youth unemployment rises to record levels. The central bank is trying to counteract this. But China’s problems are much more explosive than officially admitted – and they are of a strategic nature.
China’s economy is faltering. For years, Beijing was bursting with self-confidence and confidence in the future with economic miracle figures. Now everywhere it seems that reverse gear has been put in place: exports fell by 7.5 percent year-on-year in May, and imports shrank by 4.5 percent. Manufacturing, real estate sales, retail sales, the labor market – everything is weakening. In May, urban youth unemployment reached a record high of 20.8 percent. The Purchasing Managers’ Index slipped to its lowest level in five months in May, clearly signaling a downturn. Car sales only added up to a meager 10.6 million in the first five months, the annual sales figures of 27 million (average for the past seven years) are hardly ever reached again, and a brutal discount battle has gripped the Chinese car trade. In order to support the economy, the Chinese central bank is now cutting interest rates and pumping 237 billion yuan (30.6 billion euros) into the economy. But the new money will hardly alleviate the problems.
The Institute for the World Economy warns: “Falling real estate prices and the financial problems of numerous real estate developers have not only dampened construction activity, but also had a negative impact on consumer spending.” Analysts point out that China is not only in short-term difficulties. Four problems also weaken China strategically and could mean that China’s long-term rise has come to an end and the country has passed its peak.
A nation is shrinking
First China is reeling into a demographic crisis. China’s society is aging and shrinking rapidly. For the first time in over sixty years, more people died in China than were born in 2022. Only 9.6 million Chinese saw the light of day in 2023, in 2022 there were a million more. With 10.41 million deaths, China has officially shrunk by 800,000 people. The process will accelerate from now on – this is a long-term consequence of the one-child policy. On the one hand, India has overtaken China as the most populous country in the world. On the other hand, demographers have determined that China will be reduced by 10,000 people every day in the coming years. By 2050, according to UN forecasts, the population is likely to fall by 109 million.
Since China does not allow any significant immigration, the shrinking and aging population is threatened with considerable social upheaval. From the health system to the pension system, conflicts are growing. At the same time, the labor force and the consumer market will shrink. China’s whole rise model is thus fundamentally reversed. The National Health Commission projects that the number of retirees will increase from 280 million to more than 400 million by 2035. Financing this poses massive problems for the Chinese leadership.
Lonely Giant
Secondly China is in an isolation crisis. China has very few real allies. Unlike the West, which has created a global federation of states with the same value orientation, China is culturally and politically quite alone on the world stage. Worse still, almost all direct neighbors are at a critical distance, competitive or openly hostile to China. Language, writing, norms and identity could hardly be exported either. This puts the growing power of China in an isolation trap.
China is trying to compensate for the isolation complex with renewed military aggression. The repressive annexation of Hong Kong and the military pressure on Taiwan bear witness to this. The conflicts with the Philippines, Japan and Vietnam in the South China Sea too. There are even regular shootings with India. Similar to Russia, destructive foreign policy discharge energy is brewing. The risk that China will soon start a war is now real.
This in turn means that growing parts of the world economy are now opting for “de-coupling” and making themselves more independent – if only out of economic rationality – from a China that is becoming more insecure and aggressive. Western companies are attempting to relocate their operations to other countries, either by relocating to the US or by “friendshoring” to more democratic, human rights-friendly countries. This makes other locations in Asia more attractive. The effect is already noticeable: Analysts expect higher GDP growth in Vietnam or India in 2023 than in the middle country. Last year, China accounted for only 50.7 percent of US imports from Asia; In 2013 it was still over 70 percent.
The real estate bubble
Third China slides into a business model crisis. The domestic real estate boom and aggressive overseas exports of manufactured goods have fueled China’s boom for four decades. Both are over now. The real estate bubble bursts, China is sitting on an unsold stock of more than 50 million apartments, even large real estate groups are having financial difficulties. Everywhere there are debt imbalances in the real estate sector, which accounts for 30 percent of the overall economy. The struggling giant Evergrande was just the beginning. About 30 other real estate companies have defaulted on their repayments to investors or have initiated a restructuring. China’s top-selling real estate group, Country Garden, reports that the real estate markets have “rapidly slipped into a severe depression”. China’s construction companies rely heavily on the sale of real estate long before it is built to ensure liquidity. But now sales have plummeted, resulting in a chain reaction of financial problems. Land sales fell 22 percent in the first quarter of 2023. Due to sluggish demand, sellers in some Chinese cities are now offering apartments with welcome money to lure buyers in the first place.
The real estate crash also has a political impact. For years, China’s local governments financed themselves mainly through the sale of land to real estate companies. They too are now in financial difficulties – like millions of private individuals. Because more than 70 percent of Chinese wealth is tied up in real estate.
And the second pillar of the business model is also shaking. Exports are weakening because China is no longer a cheap production location, global competition is pressing and the West is asserting its own interests more sharply in trade relations. The USA’s restrictions on chip exports to China are preventing investment. China is in danger of losing the cold tech war between China and the USA, mainly because more and more trading partners are becoming more critical. At the moment it looks like India in particular could benefit from China’s new weakness. Overall, China has found itself in a situation where it is much more dependent on Europe and the US than the other way around. Last year, China exported 6.4 million 40-foot containers to Europe, while Europe shipped only 1.6 million containers to China. In terms of value, EU exports to China last year were just 23 percent higher than EU exports to Switzerland. China must therefore seek compromises with the West. The semiconductor war with the USA is a demonstration of the balance of power in favor of the West.
power struggle at the top
Fourth the political system crisis comes to a head. The tough corona policy and arbitrary lockdowns and their chaotic end in December 2022 have shaken confidence in the political leadership. There is an open power struggle between the new business elite and the party leadership, in which the political decision-makers in the Communist Party are increasingly relying on repression. And that, in turn, is bad for the economy. In a remarkable doctrine, President Xi Jinping recently advocated doing business more according to “Marxist” values in the future. All the alarm bells are ringing, and not just among global investors. It is also an indication that the regime is afraid of losing power.
Diplomats from Beijing are increasingly reporting internal tensions among the elite. The President of the EU Chamber of Commerce in Beijing, Jörg Wuttke, warns in Schweizer “Techmarket”: “China is not only feeling the headwind on the real estate market and with the problem of highly indebted local governments, but also as a result of the technology war with the USA, which is considerably weakening the ability to innovate. The loss of confidence among private entrepreneurs in the country is also serious. There are still individual areas in which private entrepreneurs can shine, for example electric vehicles or renewable energies. But there is great uncertainty in the tech sector. Important people are demoralized and are leaving. It’s like Bill Gates turning his back on the USA “The intimidation campaign against the bankers, who are accused of being hedonists, doesn’t help either. The influential investment banker Bao Fan was recently arrested. The party leadership repeatedly alienates private entrepreneurs.” Wuttke summarizes the situation as follows: “China is becoming more control-crazed and more communist.” However, this is a sure sign of an imminent economic crisis.