OPINION:
The Biden administration is getting smug and too worried about China’s economy.
China’s miracle growth over the two decades preceding COVID-19 was greatly aided by three sets of forces: the liberalization of land development and accelerated urbanization and homeownership, entry into the World Trade Organization and resulting surges in foreign investment, and industrial policies designed to create world leaders in next-generation industries.
All were built on financial houses of cards.
Municipal governments created local government financing vehicles, known as LGFVs, that borrow to build roads, factories, utilities, airports and other infrastructure.
That debt doesn’t count against central government limits on provincial and local authorities. LGFVs could be counted on to power up demand, investment and growth whenever the national economy slowed.
With their debt carrying an implicit government guarantee, they did not always borrow and invest prudently, have required operating subsidies from local governments and amassed $9 trillion in debt — about half of China’s gross domestic product.
Too often, their projects did not generate the revenue anticipated, and many LGFVs are teetering on collapse. Beijing has reportedly approved provincial governments issuing $206 billion in new debt to help prop them up, but that would only buy some time and exacerbate local governments’ budget problems.
The latter have been getting a lot of their revenue by selling land to developers, but housing prices have been falling in the wake of COVID-19, slower growth, and fear that homebuilders will collapse and not deliver promised new residences.
Private real estate developers like now-bankrupt Evergrande and Country Garden borrowed from trust companies and banks to build homes and office buildings — and many projects became white elephant projects both in China’s ghost cities and nearby Asia — for example, Forest City in the straits between Malaysia and Singapore.
They also borrowed from prospective homeowners.
Now China has the paradox of real estate development companies with unsold apartments in ghost cities and unable to deliver prepaid-for homes in places where housing is needed. Prospective new buyers are wary, driving down real estate values, and municipal land sales and threatening the resources of municipal governments need to shore up LGFVs.
Development companies borrowed from China’s shadow banking system — trust companies — and ordinary banks.
Trust companies sell exotic products to wealthier clients by promising outsized returns and lent that money to real estate developers and invested in stocks, commodities and other nontransparent assets. Prominent among them, Zhongrong has missed payments to investors.
China’s banks have about half of their assets tied up in local government debt and various forms of property loans — credit to real estate developers and trust companies as well as plain-vanilla mortgages. The biggest chunks are mortgages, but many of those won’t get paid if promised homes are not delivered or real estate loses its value.
Evergrande’s bankruptcy potentially strands 1.6 million people who have paid for undelivered homes, and housing prices in major cities have fallen by double digits since Evergrande missed bond payments in 2021.
Cracks are emerging in China’s vaunted industrial policies. Although it has accomplished parity or superiority in manufacturing technologies, supercomputers, artificial intelligence, solar panels, electric vehicles and batteries, much of it is driven by protectionism, subsidies and technology theft.
Some 400 EV manufacturers have gone bust, and U.S. multinationals are finally getting smart.
Apple is aggressively diversifying its iPhone supply chain out of China, and new foreign investment in China is at its lowest level in 25 years. More capital is leaving the country than coming in.
China’s exports are plummeting, and it’s becoming more dependent on Russia — not a great bet considering the impact of Western sanctions on the likely growth of that market.
Through the first six months of this year, U.S. purchases from China were down 25% from last year, and its share of U.S. imports is down by one-third from just before former President Donald Trump took office.
Coming off the COVID-19 lockdowns, China’s economy will expand about 4.5% this year, but in the future, Beijing will have to pump an awful lot of liquidity into its banks, trust companies and LGTVs to avoid a financial crisis. Eventually, that will turn the nation’s deflation problem into rapid inflation.
President Biden and commentators are right to assess China’s economy as a ticking time bomb and having long COVID, but China is not the global economy.
In the near term, the impact on the major advanced industrialized countries is not huge because China has always been more hellbent on exporting than buying our products.
Things are tougher for China’s South Asian trading partners, but as Western supply chains for products like iPhones move into that region, new and more open centers of growth will expand — markets more receptive to U.S. and European exports and a sounder basis for interregional South Asian trade.
Don’t sweat China’s meltdown. Leave the sleepless nights to President Xi Jinping.
• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
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