Property Market Becomes Lead Weight for China's Economy

The Chinese economy may have beat projections and expanded at 4.9 percent, the country's National Bureau of Statistics (NBS) announced on Wednesday, but troubles in its property sector continue to weigh down on growth.

On a quarterly basis, the economy grew by 1.3 percent, marking a better performance than the 0.5 percent growth in the April-June period.

But China's official statistics agency said the fundamentals of economic recovery are still weak.

"We should be aware that the external environment is becoming more complex and grave while the domestic demand remains insufficient, and the foundation for economic recovery and growth needs to be further consolidated," said NBS in a statement on Wednesday.

Despite a relatively better performance than the previous two quarters, the crisis brewing in the real estate sector continues to signal broader economic trouble.

China's real estate giant Country Garden risked default after missing bond payments. The company missed a $15 million coupon repayment owed to bondholders who are now seeking to strike a debt restructuring deal, according to sources who spoke to Reuters.

One of the bondholders has $2 billion of the Chinese real estate company's offshore bonds. The latest default on the bond payment could lead the company to end up like Evergrande, another Chinese real estate giant, which went bankrupt.

In August, Evergrande filed for bankruptcy in the U.S. after being unable to pay $200 billion in debt while the company's stock tanked in Hong Kong and mainland China. Beijing has tried to cover up the scale of Evergrande's crisis.

Rumors began circulating that Country Garden's founder, Yang Guoqiang, had fled the country, which the company denied by posting on its WeChat account.

Country Garden's default will only reveal the trouble brewing in the real estate sector, as the demand for new homes and infrastructure isn't up to the level of new projects coming up.

Earlier, the CEO of Evergrande was arrested on unspecified "illegal crimes." On Friday, Evergrande revised the restructuring deal as the company prepared for the U.S. bankruptcy hearing scheduled for later in the month.

But the real estate crisis isn't the only one. China's local governments' extremely high borrowing levels have a troubling message for the economy.

On Tuesday, according to Reuters, Beijing asked the state-owned banks to roll over existing government debt into long-term loans with lower interest rates. The provincial governments have used local government financial vehicles (LGFVs) to raise funds for new infrastructure projects, which have become the backbone of China's growth story over the past two decades. However, the local government debt has reached the process of investing in inefficient projects that have yet to yield expected returns.

"When you have 30 years of rising prices, there is no way you can stop that process without tremendous pain in every part of the economy," Michael Pettis, a senior fellow at Carnegie Endowment for International Peace, told The New York Times. Pettis said that it remains unclear who will pay the political price for the mess in the Chinese economy.

The provincial governments could, in the past, seek foreign investment to boost the economy, but those days are now long gone. Foreign direct investment continues to dip as instability in China's domestic politics keeps big investors away.

In 2022, the local government debt reached a new high at $12.58 trillion, making it 76 percent of China's economic output.

Adam Posen, the president of the Peterson Institute of International Economics, argues that the Chinese economy is suffering from a lack of confidence after Xi Jinping targeted the private sector, and the efforts to stimulate the economy have fallen because of the declining confidence.

"The same trend is already visible in China because Xi drove up the Chinese private sector's immune response to government intervention. Stimulus packages introduced since the end of the zero-COVID policy, meant to boost consumer spending on cars and other durable goods, have not gained much traction," Posen wrote in a recent Foreign Affairs article.