China needs to defuse its economic ticking time bomb

Crumbling confidence in the construction sector is just the tip of a gigantic iceberg of bad debt

American President Joe Biden described China’s economy as a “ticking time bomb” earlier this month. But Beijing appears unable or unwilling to defuse it. 

On Monday, property giant Evergrande resumed trading in Hong Kong and saw US$2.2 billion wiped off its value. The company has debts of more than $340 billion and acted as a precursor that ignited the economic crisis. 

Yet it is not just about cascading bricks and mortar. 

“Consumer spending, business investment and exports have all fallen short,” The Economist stated in an editorial at the weekend, entitled Why China’s economy won’t be fixed.

“And whereas much of the world battles inflation, China is suffering from the opposite problem. Some analysts warn that China may enter a deflationary trap like Japan’s in the 1990s,” it added.

China’s bad loans [risk] setting off economic contagion.

Dexter Roberts, the author of The Myth of Chinese Capitalism

Build them and they will not come:

  • At least four million residential homes are now unoccupied nationwide.
  • Country Garden, one of China’s largest property developers, is facing default.
  • Rival Evergrande was forced to file for bankruptcy after defaulting on debts in 2021.

Delve deeper: Yet crumbling confidence in the construction sector is just the tip of a gigantic iceberg of insolvency. In addition to shrinking exports and consumer spending at home, local government debt topped $13 trillion last year, or 76% of economic output. 

Between the lines: “China’s efforts to deal with bad loans is exacerbating the gap between wealthier provinces and poorer ones and risks setting off economic contagion,” Dexter Roberts, the author of The Myth of Chinese Capitalism, posted in his Trade War newsletter.

Big picture: “For years, many economists’ belief in the so-called China miracle of perpetual growth led to misplaced confidence in the political leadership. That confidence has now faded,” Foreign Policy’s China Brief reported last week.

China Factor comment: Unemployment among the young is another major problem as we reported at the weekend. But the biggest challenges are stagnating wages and President Xi Jinping’s insistence on politicizing the economy. Tick, tick, tick.