Beijing is tanking the domestic economy — and helping the world
The writer is the founder of The excess and the co-author of Trade Wars Are Class Wars.
China’s crackdown on property developers and its draconian “Covid Zero” policy is bad news for most people, as well as for companies abroad looking to monetize Chinese customers.
But China’s internal problems have a positive side: lower demand for imported metals, energy, food and capital goods is easing inflationary pressures in the rest of the world. For the first time in decades, the country’s huge trade surplus is a boon to workers elsewhere.
The downturn in the housing market began last summer in response to government restrictions on mortgage lending and developer leverage. Homebuilders sold an average of 156 million square feet of living space per month from April to June 2021. This year, Chinese developers have sold only 106 million square meters per month during the same period.
The decline in demand has spilled over into new construction, with the amount of “started living space” falling by almost half in April-June 2022 compared to last year. The pace of housing construction has not been this slow since 2009.
The result is extra supply for the rest of the world. Iron ore, metallurgical coal and copper are essential materials for making structural steel, household appliances and electrical wiring. Before the recent downturn, China consumed about two-thirds of the world’s iron ore and metallurgical coal and about 40 percent of the copper. Lower demand means lower prices. Compared to the recent peak in July 2021, iron ore futures have fallen by half, while Chinese metallurgical coal prices have fallen by about a third. Global copper prices have fallen by a quarter despite the expected tailwind from additional climate-related green investments in the US and Europe.
This has broader implications. Residential real estate is also the only asset class widely available to Chinese savers outside of bank deposits, dwarfing the value of Chinese stocks and bonds. Until recently, Chinese consumers borrowed from banks to buy new homes – yet to be built – as investment property. Now developers are failing to complete their projects due to lack of cash, some would-be home buyers are refusing to pay their mortgages, and some local banks are holding onto savers.
In addition, China’s provincial and local governments depended on revenue from land sales to cover about a third of their expenses. That money is no longer coming in. According to the Chinese Ministry of Finance, the local government’s revenue from land sales this year has so far been were 31 percent lower than in the first six months of 2021.
While the local government bond issuance is rising – the amount raised in May and June 2022 was the highest amount ever in two months – this mainly reflects cash flow shortfalls rather than new capital expenditures. Desperation is leading some local governments to raise money at a yield of about 9 percent from household savers, even though the central government is issuing 10-year bonds at yield under 3 per cent.
The impact of the housing crash in China is compounded by the government’s Covid-related restrictions. Chinese consumer spending was barely higher in the first half of 2022 than in the first half of 2021, taking inflation into account, and is now rising more than 10 percent below pre-pandemic trend. Chinese oil refineries are Process 10 percent less crude oil since April compared to last spring thanks to the decline in petrol demand. Electricity consumption, which grew by about 7 percent a year before the pandemic, is now growing at just 2 percent. China’s weakness provided a powerful counterbalance to the pressures on global energy supplies from Russia’s invasion of Ukraine.
China’s domestic weakness is crushing demand for goods from the rest of the world. Expressed in dollars, expenditure on imports has remained the same since the end of last year. Factor in rising prices, and China’s real import demand drops by about 8 percent since the start of the lockdowns, according to estimates by the Central Planning Bureau. However, China’s exports continue to rise, providing foreign consumers and businesses with the goods they need.
In the past, the massive imbalance between China’s healthy exports and weak imports has been a drag on the global economy, depriving workers elsewhere of the income they would have earned by selling goods and services to Chinese customers. But with inflation and commodity shortages more of a concern than underwork, China’s problems may be just what the rest of the world needs.