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China's current economic crisis is the one it refused to have in 2008. Now, the problems are far larger than they were two decades ago, and they cannot be solved without a crisis of historic proportions.
The country avoided a downturn in 2008 only by embarking on one of history's largest and longest spending campaigns. First, there was a $586 billion, two-year stimulus plan. Second, Beijing ordered state banks to go on a lending spree. In the five years starting in 2009, Chinese banks extended an amount of credit that was roughly equal to that in the entire U.S. banking system, even though at the end of 2008, the Chinese economy was less than a third the size of America's. And the lend-a-thon continued long afterwards.
Beijing technocrats had long dictated outcomes, so that was the approach they adopted in 2008. As they overpowered market forces in China, they prevented the corrections that swept market economies beginning that year. Yet because Chinese officials were determined to avoid a downturn at home, the underlying imbalances in China's economy became larger.
"Going back to the stimulus in 2009, it was clear that the reliance on property, land sales, and debt for growth was unsustainable," Andrew Collier, now managing director of Hong Kong-based Orient Capital Research, told me. "I witnessed this on numerous trips to various provinces starting in 2006 for Bank of China where the overbuild in property in rural areas was quite obvious along with the ignorance of local officials about basic economics. Beijing ignored these problems until around 2016 because it was too hard to control and too convenient to use."
The result is that China now has far too much debt—almost certainly in excess of the generally accepted 280 percent of gross domestic product—and is far too overbuilt. Last month, He Keng, a former deputy chief of the statistics bureau, said China had enough vacant apartments to house its entire population of 1.4 billion people. Some think the vacant apartments can accommodate 3 billion people.
China has so far been able to avoid the appearance of a crisis by refusing to register sales that fall below regulatory minimums, among other techniques. As a result, China Index Academy, a real estate research company, was able to report that new home prices last month increased 0.05 percent from August.
Beijing can rig purchase prices to avoid a reckoning, but the effort causes worse consequences. For instance, property sales fell 26 percent in 2022. New home sales at the 100 biggest developers were down 29 percent in September, compared to the same month last year. Furthermore, in August property investment was down 19 percent year-on-year, the 18th straight month of decline. New construction starts were off 24 percent in the first eight months of the year, year-on-year, according to the official National Bureau of Statistics.
These numbers are consequential.
Property developers like Country Garden, the biggest by sales from 2017 to 2022 and recently thought to be financially sound, have been missing bond payments. Evergrande, once the country's biggest developer, defaulted in 2021. Reuters estimates that companies accounting for 40 percent of home sales have defaulted on obligations. Goldman Sachs estimates China's current property debt is 58 trillion yuan, about $7.95 trillion.
The problems of the developers are spreading to the $4.5 trillion shadow banking sector, something that was virtually inevitable. In August, stock exchange filings revealed that Zhongrong International Trust, a shadow bank, had not been making payments on its trust products, causing pain to radiate throughout the corporate sector. The problems of shadow banks, largely the result of the property crisis, will almost surely spread to the formal banking sector.
"I really do not know what will happen now, but bailouts of smaller banks are occurring all over the country," reports J Capital Research's Anne Stevenson-Yang.
The central government has to do something. The property sector accounted for a stunning 25 percent of gross domestic product in 2020. Some assessed the figure to be as high as 30 percent. Property accounts for an estimated 70 percent of household wealth in China.
As property companies default, buyers, who make deposits on unfinished flats and pay mortgages before taking delivery, have taken to the streets. So far homeowner protests have been small and scattered and therefore easily, controlled, but as the big developers fall, the possibility of contagion increases dramatically.
Almost no watcher of the Chinese economy thinks there will be a "Lehman moment" of markets collapsing. "Like the U.S. in 2008, China is fighting its own battle with a property bubble," Collier told me. "Unlike the U.S., it won't collapse quickly, because it has a different financial system."
Chinese ruler Xi Jinping believes he can determine economic outcomes. As powerful as he is, however, he cannot overcome the law of supply and demand. Yes, that iron law works differently in China than elsewhere, but try as he might, he has not been able to change human nature—meaning the law still applies in the People's Republic of China.
"I think the problem is just too big to resolve," Stevenson-Yang, also author of Wild Ride: A Clear and Sharp History of the Opening and Closing of the Chinese Economy, told Radio Free Asia. "I have no idea what their plan is other than to hide head in sand. I actually think they are bureaucratically stuck."
China has too much property, and there is no solution short of either short-term crisis or long-term catastrophe, or perhaps both.
Gordon G. Chang is the author of The Coming Collapse of China. Follow him on X, formerly Twitter, @GordonGChang.
The views expressed in this article are the writer's own.
