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10 Reasons China’s Economy Is Crashing and Won’t Recover Anytime Soon

China’s economy was slowing drastically last year before the coronavirus outbreak in Wuhan.  There were multiple signs that China’s economy was in horrible shape, now they are glaring.

1. China over built real estate at levels worse than the US in 2008.

Politicians would have you believe that the 2008 financial meltdown was related to the more recent actions of one party or the other, but the roots of the 2008 housing market crisis really began in the 1930s with the creation of the Federal Housing Administration (FHA), which guaranteed banks’ mortgage risks and the Federal National Mortgage Association (FNMA), which effectively insured mortgages by purchasing mortgages from lenders. Both shifted risks from the lenders to the US taxpayers. Then in 1977, the Community Reinvestment Act (CRA) was signed into law by President Jimmy Carter. This law was designed to promote home ownership for minorities by prohibiting banks from refusing mortgages in poor areas due to the loan’s high risk. In addition, mortgage lenders were required under the 1975 Home Mortgage Disclosure Act (HMDA) to provide data about who they lent to. Then in 1991, HMDA rules were tightened and included specific demands for racial equality in the institution’s lending.

Credit-worthiness was no longer relevant in the US and the volume of subprime loans exploded. The government had inserted itself in the mortgage business. Like most government initiatives, their plans were doomed. Americans lacking the ability to pay for mortgages were provided mortgages at teaser rates that when fully adjusted would never be paid. This ultimately climaxed in 2008 with the subprime crisis that sent shock waves around the world and put financial markets in a tailspin.

China’s actions somewhat mirrored those in the US in 2008. As China grew, it invested in its infrastructure and in addition, it invested in large housing projects throughout the country. These efforts helped bolster China’s already fast growing economy.

The problem is that China over invested in these random properties all over China and these properties today remain empty.

 

2. Related to real estate crisis is the fact cash-to-short-term debt levels are reaching all time lows for real estate companies.

These many properties throughout China sit unoccupied, and there is a cost to this. Bloomberg reported in September 2018 –

Cash-to-short-term debt levels at more than 80 publicly traded real estate companies tracked by Bloomberg were 133 percent on average in the first half, the worst since the first six months of 2015 and down from 297 percent a year earlier. Almost a quarter of developers sport a ratio below 50 percent.

3. China long term debt is also on the rise.

In addition, Bloomberg noted:

But while business has been booming, developers have also been piling on the debt. Firms have been selling more bonds in the domestic market — and at the cheapest rates as investors shrug off default concerns. Those with dollar-denominated obligations, meanwhile, face higher borrowing costs as the U.S. Federal Reserves continues on its tightening path.

4. The amount of debt in China is massive and the amount is unknown.

The total amount of China debt is unknown with S&P estimating the amount not reported by local communities and banks being over $6 trillion:

China may be sitting on a hidden debt pile of as much as 40 trillion yuan ($6 trillion), concealed off-balance-sheet by the country’s local governments, according to research from S&P Global Ratings.

Many local governments in China raise debt and hold it off their balance sheet, in order to avoid lending limits imposed by central authorities. S&P says that this is a growing problem within the country, and that the amount of debt held this way has likely ballooned in recent years.

(Note in the US it is considered fraudulent to maintain off-balance sheet accounts – accounts for liabilities not showing in an entity’s financial statements.)

5. China’s default risk is huge.

The government may have to take over these debts as they become insolvent –

Not only is the level of hidden debt held by local governments in the world’s second largest economy rising, but so too is the risk of those debts being defaulted on. Much of the debt is held by so-called local government financing vehicles (LGFVs), and S&P reports that central government may be willing to let these vehicles file for bankruptcy in the future.

“Default risk of LGFVs is on the rise. China has opened up the possibility of insolvent LGFVs filing for bankruptcy, but managing the default aftermath is a formidable task for top leadership,” the report noted….

The country’s total non-financial sector debt, which includes household, corporate and government debt, will surge to almost 300% of GDP by 2022, up from 242% in 2016. Fears abound that if this debt pile continues to grow, a spectacular blow up could be imminent.

6. Companies are leaving China in swarms.

I personally spoke with one China CEO last year who I know who said that a fellow manufacturing CEO in China said the economy in China was “terrible”.  I also spoke with another head of a manufacturing company in China and he moved his operations to Thailand. He said that there was no more room in Vietnam for his company at a reasonable cost because Vietnam was full as companies from China, so he and his manufacturing plant moved to Thailand.

These are only two instances but are an indication of the economy in China.  The problem with this scenario is it provides China no ability to recover.  It can only recover with business but the business is all leaving China.  They can’t just continue to build and spend.

7. China incurred record corporate bond defaults in 2019.

Corporate bond debt defaults set a record in 2019:

The world’s second-biggest economy ended 2019 with record corporate bond defaults, a result of the slowest growth in nearly three decades. More than 150 onshore companies reneged on debt payments totaling about $19 billion. That was up from 120 companies and $17.6 billion in 2018.

8. China’s ratio of corporate debt to GDP jumped to 160% by the end of 2017.

China’s ratio of corporate debt to GDP is also large:

Fitch, S&P Global and other rating agencies are now warning of more to come as financing dries up for private companies, worsened by the global trade war and a decade of debt-fueled growth coming due. China’s ratio of corporate debt to gross domestic product jumped to a record 160% by the end of 2017 from 101% 10 years earlier.

9. China’s GDP growth rate before the coronavirus was likely negative.

The BBC reported on official China figures from last month.  China’s GDP growth is the lowest its been in nearly 30 years and some economists believe it may actually be negative growth.

10. The Wuhan coronavirus is a killer.  It’s killing China’s economy!

There are many indications that the China economy is in peril.  The coronavirus may have killed it.  Can you imagine the US economy totally shut down for a month?  That is exactly what is happening in China and Hong Kong now.

Hong Kong’s world class airport handled over 71 million passengers in 2019 which is around 200,000 passengers a day.  According to the Hong Kong Immigration Department it’s now down to around 7,000 passengers a day.  Hong Kong is not the only  major airport in China seeing this pattern.   The entire country is this way with almost no international flights going to and from China for the past month.

The streets and roads in some cities are closed down.  The roads are empty.  This all takes its toll on the economy.

To think that only a couple of years ago under the Obama Administration the world was saying that China was soon to pass the US in GDP and reports were that this may have already occurred. Today the US is the world’s strongest and largest economy by far. It is now nearly twice as big as China’s and the US economy is growing while China’s economy is collapsing.

China’s economy is in clearly failing and in peril.

 

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18 COMMENTS

  1. I am skeptical of an article that includes bits like: “I spoke to two people and they said the economy is doing poorly, so that is an indicator that things are turning to shit”.

    These are only two instances but are an indication of the economy in China. The problem with this scenario is it provides China no ability to recover. It can only recover with business but the business is all leaving China. They can’t just continue to build and spend.

    The premise that our economy is overly reliant on China is a valid one. Some of the numbers are here on Stuff. China is double our export trade compared to the US.

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  2. These filthy communist dictators have been lying to the rest of the world for 30 years about the economic miracle that they have built,in the end someone has got to pay the piper and unfortunately it won’t be these few thousand bastards that pay it will be the hundreds of millions of normal Chinese that suffer.
    It’s been the biggest lie ever told in the history of the world and now it’s coming tumbling down ,it won’t be nice for us either and this COL won’t have the slightest idea what to do about it.
    The end game was world domination ,the biggest fear the CCP has ever had is a popular uprising by the 1300 million enslaved citizens and apparently the fury over the misshandling of the Coronavirus has awoken the people.

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    • “…about the economic miracle that they have built,…”

      China would not have been able to build its fortunes, have so many made wealthy (or at least lifted out of poverty), and have the money to build its armed forces were it not for the desire of the US and the West to permit their corporations to set up factories in the Far East to manufacture (cheaper) products for Western consumers.
      Didn’t anyone in the West ask themselves the obvious question: “Let’s make a huge, ruthless one-party state incredibly wealthy and see what good will come of it?” (Ignoring the question of whether the staus quo of an impoverished and hungrier one would be safer.)

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    • I see two major changes in China even assuming Covid 19 is contained. China as the major supply chain partner will see its manufacturing industry decline as their customers see the folly of a single source and so they will diversify their sources which will be good news for others, hopefully including suppliers in the country of origin. Next the Chinese people will hold to account their Govt for being economical with the truth, more so if the result is a collapse in their property values and loss of savings in the financial institutions that fail as a result of perceived or actual policies. I sincerely hope this does not happen as whatever the cause ordinary Chinese do not deserve the devastation that Covid 19 is creating, rather I hope China embraces greater freedom for its own citizens and genuine cooperation with others to solve more important issues than Military domination of others.

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  3. Jon Krakauer wrote:

    …… “Launching a nice little war to divert national attention was a gambit no less appealing to nineteenth-century politicians than it is to their present-day counterparts.”…….

    This is what we may face.

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    • I really hope and probably you do that this does not happen and with Trump clearly seeking to avoid war there is some hope. The recent shootings in a Shisha Bar appear to be a racially motivated attack on Turkish people – Tobias Rathgen is described in press reports as right wing and the action one of a dislike or worse of migrants. Thuringa Province ion Germany has jutr voted and AfD has increased its political influence considerably, uncle Adolf’s first political sucess was in Thuringa and I do wonder if history is repeating itself.

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  4. Have just read that the CCP has installed 40 incineration units in Wuhan – I can see a requirement to incinerate contaminated hospital waste but given the individual units capacity of 5 Tons a day I wonder if some are not destined to be used to supplement the Crematoria in Wuhan currently reported as burning 100 bodies a day. Doing some maths with a little guess work that 20 units will burn waste then assuming an average body weighs 100Kg each unit has a capacity of 50 bodies a day – total 1,000 bodies a day plus crematoria. I hope that this is not already the case with a backlog to deal with rather pre planning just in case, I am cynical and suspect there is a current need.

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    • I’ve been pondering along the same lines freethinker. Many are telling us that everything is under control & all will be well but they are used to reasoning with a full deck of information. I would not trust one bit of news or any statistics coming out of China that hadn’t been verified by multiple independent sources.

      I don’t believe anything Hugzilla says so why should I trust a secretive one party state agency?

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  5. Wow
    That is a completely shit house article clearly written by a journo (aka liar) who read a few things (written by other journo liars most likely; with references to Demoncrat Prez candidate Bloomberg’s yankee media garbage 🙂 ) and then reported this Magnus opus proving he is smarter than a third grader..just.
    There is no source so I don’t know who this is.

    It is full of crap like ‘is unknown’ or ‘may have’ .
    But you know, things could be bad. They really could if we click out heels, Dorothy.
    This clown is US centric and does not understand what happens outside the USA. That is the norm in America.

    For a start:- Standard and Poors are not that good.
    https://en.wikipedia.org/wiki/Standard_%26_Poor%27s#Criticism_and_scandal
    …When the real estate bubble burst in 2007, many loans went bad due to falling housing prices and the inability of bad creditors to refinance. Investors who had trusted the AAA rating to mean that CDO were low-risk had purchased large amounts that later experienced staggering drops in value or could not be sold at any price. For example, institutional investors lost $125 million on $340.7 million worth of CDOs issued by Credit Suisse Group, despite being rated AAA by S&P….

    In the Asian Financial Crisis 1997 S+P were out of their depth.
    For rating local USA companies they are OK. For Dynamically evolving countries…not so much.
    Their stock market indices are based on simple Math. They should not get that wrong. This then gives them false street cred.

    The clown writer compares USA which uses Quarterly reporting (not really a good idea but what the USA is driven on ) with China and its long term planning and is still essentially a Command economy.
    The Entities are all effectively owned by the Chinese Govt as shown with talk about Huawei
    If they say everyone takes a 20% pay cut then …so it shall be.

    It would be better to compare China to South Korea or Japan as Asians and its neighbours.
    However this clown writer will know even less.

    The First ‘point’ is bollocks.
    This compares the USA and legislation made there . It conveniently does no elaborate on the Savings and Loans Scandal in the USA of the early 1990s.
    It goes on about stupid legislation for minorities which is a daft USA thing pushed by the Ted Kennedy’s and other idiot Demoncrats. It is a USA disease. It is not contagious. (Well maybe the over indulgence of the Maori in NZ by successive Notional and Liebour intellectual pigmies)
    It is a millstone around the neck of USA business.

    The biggest contributor to the USA’s economic woes of the last 30 years is the repeal of the Glass-Steagall Act.
    No mention of that.

    This was the final unleashing after loosening financial regulation from the Reagan era.
    This was done near the end of days of Bill Clinton in 1999
    It was a wrong move IMHO – backed up by much writing.
    Next stop. 2008 and the GFC.
    None of this legislation applies in China.
    Two different beasts.
    The twat is trying to apply USA economic folly to China just like it tried to bring ‘Democracy’ to Afghanistan with guns.

    This is comparing USA Quarterly obsession with China. How about comparing to Japan. That had a real estate boom in the 1980s and it crashed. It has never recovered from that. Ergo, each country is different.
    USA goes on largely 10 year boom and bust cycles.

    The USA embraced globalism.. well the aspects that suited it.
    It has a very protective economy but wants others to be open. Hence my disdain for the wanky WTO.
    China actually got on and ran with ‘globalism’; and suddenly USA woke up and China was in the Pacific, in Africa.
    How did that happen?
    Perhaps USA was a bit busy to notice while it was bringing peace and democracy since 2001 to Afghanistan; Libya; Syria; and Iraq.

    This is written by a lying media filth clown who clearly only reads other lying media filth crap ..or are they really ‘celebrities’ ?
    This clown is clueless.
    I only read up to ‘point 6’
    Grading:- Shit. Must do bedda.
    Actually no, just give up and become a factory worker…if there are any factories left in USA after Obummer finished.

    One is better to read the book ‘The Wal-Mart Effect’ by Charles Fishman.
    It is well written and explains the USA economy and how it became beholden to China.
    ISBN 978-0143038788
    It is a bedda use of time than reading garbage from this keyboard clown who must have had to punch out xxx hundred words by Friday, never mind the quality.

    Ed.
    You are better posting stuff from the likes of Different Perspective as you did yesterday than posting this anonymous crap.
    E&OE 🙂

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  6. Sounds like our own shit box housing market and fake economy supporting it.

    Your house is worth 30% of what you think it is campers.

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    • I hope so, for the sake of young, NZ-born, first-home buyers who hope that houses are for nesting; not investing.
      If the flower of your youth are mired in the “sam-po” dilemna that is blighting the youth of South Korea, then your nation has problems.

      Ref: https://en.wikipedia.org/wiki/Sampo_generation
      Sampo Generation (Literal translation: “Give-up the Big-3 generation) is a neologism in South Korea referring to a generation that gives up courtship, marriage, and having kids. Many of the young generation in South Korea have given up those three things because of social pressures and economical problems such as increasing cost-of-living, tuition payments, and affordable housing scarcity.

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      • Yes we need to press reset for both social and economic reasons.

        We should look forward to the collapse as a good thing.

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        • If the value of housing stock collapses those who will get the shortest haircuts will be those who have recently bought.

          It will not really affect the retired such as ourselves who own freehold. Unless you want a large bank balance & to reside under a bridge a house is a place to live & little else.

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      • IMHO blame for the housing mess we are facing can be laid squarely at the feet of arsehole politicians of both stripes. For the past couple of decades immigration has far outstripped the supply of new homes.

        If we had welcomed only wealthy immigrants their financial ability to build their own houses would have ensured that supply roughly equalled demand. Instead we scraped no-hopers & workshy “refugees” off the streets of the world’s shitholes & wonder why our lower value & social housing isn’t there for them.

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          • The same in NZ. If it takes two good incomes to live on a financial knife edge while serving a huge mortgage breeding tends to be put off, sometimes until it is too late.

            The rot set in as early as the mid 70s & amazingly enough coincided with the arrival of colour TV. The desire to stay ahead of the neighbours & watch garbage such as Coronation St in glorious colour tipped more housewives into the workforce than women’s liberation ever did. That was the start of the property price spiral.

            We married in 1970 at 21 & 18 respectively, Mrs Nasska having previously announced that she was with child two weeks after we signed up to buy a cottage involving a second mortgage. We just made it financially with her staying home to look after the kids until they were five. It involved me working every bit of overtime I could get as a truck driver & moonlighting as a pub bouncer.

            I reckon we would have been about the last non professional people to make it onto the property ladder with one breadwinner.

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