We have had a tough time during the past three years due to the pandemic. As we start to go back to our normal lives, major problems remain: supply chain breakdowns, rising energy, and food prices, a war in Europe that affects other parts of the world, etc. And then there is China. Unnoticed by most, there are increasing signs that the Chinese economy is facing major difficulties.
In this article, I will talk about what is happening.
China’s Economy Shrinks
As the world tries to go back to a normal life, China is still following the old strategies it used in 2020 — ‘dynamic zero-COVID’ policies. Despite lockdowns in many other smaller cities and regions, at the end of March, the biggest city in China — Shanghai started a two-month lockdown.
Different from lockdowns in western cities, where the government compensates companies and taxpayers for their loss of income, people and companies in China who are affected by lockdowns have to bear the costs by themselves. The results: many small and medium businesses closed down forever. Many factories stopped production and customers found alternatives elsewhere, this is reflected in the GDP growth which is shown below.
Quarterly GDP growth rate in China (Source: https://www.statista.com/statistics/271769/quarterly-gross-domestic-product-gdp-growth-rate-in-china/ )
Chinese Unemployment Rate Rises
The shrink in GPD is not all. In June, the unemployment rate of youth aged 16–24 years old increased to 19.3% from 18.4% in May. This number indicates that almost 1 in 5 young people is unemployed now in China. On top of that, the number of college graduates in 2022 is expected to be 10.76 million, an increase of 1.67 million year-on-year, both scale and increment hit a record high. That means there will be an enormous amount of young people entering the labor market this year.
The overall unemployment rate of 5.5% in June might look not so bad. But according to the data reported by the National Bureau of Statistics, by the end of 2021, there were 200 million people in flexible employment in China, which accounts for nearly one-third of the total employed population.
Flexible employed refers to people who do not have stable employment.Many of them are doing live broadcasting on social media, delivering packages and food orders. The kind of jobs with no bright career and promotion possibilities, and with no insurance coverage.
These people are not included in official numbers when calculating the unemployment rate.
Broken Supply Chains and Outflow of Manufacturing
Although the official foreign direct investment (FDI) numbers published look good, a survey done in May 2022 by the American Chamber of Commerce in China says the opposite, slightly more than half of the respondents have delayed or decreased investments as a result of COVID outbreaks. About half of the companies said that their foreign talents do not want to relocate to China because of the ‘dynamic zero-COVID’ policies.
Global supply chains are still not back to normal. A big part of these supply chain problems is that China is still having lockdowns in different cities and many factories are not back to full production. These restrictions cause companies to relocate parts of their business. For example, Apple is shifting its iPad production to Vietnam due to strict COVID lockdowns in China.
On top of that come other problems. Textile companies have been moving out of China to southeastern Asian countries such as Bangladesh and Indonesia in the past decade due to increasing labor costs in China. Recently, consumer electronics manufacturers are also exiting China. Even Chinese smartphone makers like Huawei, Oppo, and Xiaomi are producing in Vietnam now.
While southeastern Asian countries cannot replace China completely as a world factory, the manufacturing exodus will certainly make the looming economic problems in China worse.
Bank Runs and Financial Problems
There have been rumors since a long time ago about problems in China’s financial system. However, protests in China are normally repressed and dispersed by the government or even cracked down at the organization stage.
Still, as the Chinese saying goes ‘fire cannot be wrapped in paper’, the truth will come to light sooner or later. Earlier in July, a protest happened in Zhengzhou city, Henan Province, where more than 1.000 depositors demanded the four banks in Henan give their deposits back. The four banks in Henan froze more than 4 billion yuan and this affects about 400k depositors.
Even though the relevant government department promised that the depositors would get their money back, it is another thing when it comes to implementation. Where will the money come from? Due to fraudulent activities carried out by shareholders, the savings are no longer there to be paid back. To put it another way, will the government print the money out of nowhere to pay it back to the depositors? Will every depositor eventually get their money back? One thing we know is that the confidence and trust of people are gradually being lost, and are unlikely to come back any time soon.
That is not all. Recently, many netizens in different parts of China reported that their debit cards and bank accounts have been frozen. They are only allowed to transfer money into their banks but are not able to use or take out money. Banks have been telling that they are cracking down on internet and telecom frauds as well as money laundering.
However, according to the research and analysis of a Chinese journalist, Chinese banks have been experiencing liquidity risks before the pandemic. The numbers on balance sheets seem to look good, but in fact, many banks are short of cash. This got worse over the years due to many events. To name a few: the trade war with the US, decreasing property prices, increasing local debts, serious fraud within banks, and last but not least — the endless lockdowns. Due to the economic downturn, things got worse. As a result, many Chinese banks are freezing people’s accounts in order to cover their liquidity problems. I will keep an eye on this and write a follow-up article when there are new developments.
China’s Property Market Bubble Bursts
In July, a growing number of home-buyers in China across the country stopped paying mortgages on stalled projects. These projects are all unfinished. Developers stopped building them due to various reasons.
According to data collected by netizens, the mortgage boycott includes 319 real estate projects in 113 cities.
Visualization of Chinese real estate projects involved in mortgage boycotts (source)
When too many real estate buyers stop paying the banks, the banks will go bankrupt. That is because the banks cannot impound the half-finished apartments and re-sell them in the market.
Selling use rights of land accounts for a large percentage of many Chinese local governments’ income. According to a recent report which used the average land sales revenue and general public budget revenue during the time frame2017 to 2021, the financial dependence on land (calculated using land sales revenue / general public budget revenue) of 13 large and medium-sized cities (out of 37) in China exceeds 100%.
When the real estate bubble bursts and banks go bankrupt, many local governments will not be able to survive as well. During the first half of 2022, the income from the transfer of state-owned land use rights was down 31.4%from the same period of the previous year.
The lack of income of many local governments has been confirmed and reflected by civil servants’ pay cuts in many Chinese cities. This, in turn, will further reduce consumer spending, which leads the economy to the opposite way of recovery.
China’s Population Problem
A lot of the data mentioned above are published by the Chinese government. How reliable are they? Probably not very much. I would say that most of the time, the numbers they published show a much better picture than the real situation. That is because the National Bureau of Statistics is not an independent institution but part of the government. Their job is to make the government look good. What is more, their data is not audited by any third party.
This problem also exists when we talk about the population of China.According to the official number, China has slightly more than 1.41 billion people. However, recently a database containing various information about 1 billion Chinese citizens has appeared online for sale. The seller revealed a sample of 750k data entries. After analyzing the leaked sample, demographic expert Fuxian Yi, who has been researching China’s population problem since 2000, concluded that the leaked data confirmed his previous estimates, that births in China began to decline in 1991. According to him, the actual Chinese population is now less than 1.28 billion.
What are the consequences?
If we assume that China’s population is around 200 million fewer than previously assumed, this has a corresponding impact on the economic outlook.
Here are some reasons why this is a problem in the medium to long term.
- China’s society is aging rapidly. The growing number of old people must be supported by a dwindling number of young people.
- In addition, old people consume less than young people.
- This means that some parts of China’s economy, such as the aforementioned real estate market, are far too big for real needs.
All these and other factors are putting negative pressure on the Chinese economy.
Will China’s Economy Recover?
China is experiencing a turbulent political situation right now. The 20th party congress is scheduled for November 2022. Xi Jinping is campaigning to seek and secure a third five-year term as party leader. Various factions within the Chinese Communist Party support and undermine these efforts. And that creates tension and sometimes paralysis. Important decisions are delayed until the party congress is over. In leadership, nobody wants to take the risk of making a mistake. That means that many of the recent Chinese lockdowns and COVID policies are not always based on science but also have their roots in a political war among different groups within the CCP.
The same applies to dealing with the problems described above. That doesn’t mean that things like the ailing real estate market and the weakening financial system are being ignored. But it means that the best solutions are not necessarily found (or cannot be found).
The situation is made worse by the fact that the Chinese authorities are currently massively tightening the thumbscrews of the population. With strict speech control, digital surveillance, and capital outflow control, the CCP wants to keep absolute control over what is happening.
For these reasons, I do not think the economic situation will get any better soon. It takes years for consumers, customers, foreign talents, and companies to rebuild trust and confidence in China.
Disclaimer: this article represents the personal opinion of the author. It is for informational and educational purposes only and should not be treated as financial advice.