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Why is China’s economy in trouble?

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China's housing market has crashed, investors are withdrawing, and youth unemployment is so high the government has stopped publishing the number. Senior leaders met last week to agree on a way forward.
china economy trouble

While most countries are busy fighting inflation, China’s economy is in different trouble.

China’s housing market has crashed, investors are withdrawing, and youth unemployment is so high the government has stopped publishing the number.

Senior leaders met last week to agree on a way forward.

So, what’s going on in China?

Housing crash

China has enjoyed a years-long property boom, but as the boom has faded, the dangers of its housing model have become apparent.

Chinese property developers often ‘pre-sell’ houses to customers.

Pre-sales are like buying something off the plan, but you start paying your mortgage before the house is even built.

That means developers have a financial incentive to start building houses, but not to finish them.

When business was booming, that wasn’t a problem. However, once demand cooled off, it became apparent many developers were in trouble, having committed to more houses than they could deliver.

The result has been a significant crash. One large developer, Evergrande, is facing criminal charges over how it structured its business.

Local governments

There are several flow-on consequences to the housing market turmoil.

One is the financial damage to Chinese local governments, an important part of China’s economic system.

Many local governments were themselves major investors in their local property markets. The crash has left them indebted, undermining their ability to deliver local services.

No COVID bounce

Concerns about housing and local government have been around for a while, but some hoped the end of China’s ‘zero COVID‘ era would bring relief.

The hope was that, like in other countries, Chinese consumers would be eager for a post-lockdown spending spree.

That hasn’t happened, partly because China offered less generous pandemic support than many other countries, leaving people with little money to spend.

Signs of trouble

For much of this year, China’s economic numbers have been trending in a concerning direction.

However, the true picture has been obscured by the government’s decision to withhold key statistics.

For example, the youth unemployment rate reached a record 21.3% in June but has not been published since. Foreign investment has reached record lows, but China has stopped publishing investment numbers in U.S. dollars.

Xi’s approach

When some economies are faced with the risk of a major recession, the typical response is ‘stimulus’, such as cash handouts to encourage spending or additional welfare support.

However, Chinese President Xi Jinping has appeared reluctant to approve handouts. Instead, he has blamed young people for being unwilling to work and endure hardship.

The Government’s response to the mounting crisis was discussed at a closed-door economic summit last week.

Australia

China is Australia’s largest two-way trading partner, accounting for a third of our trade with the world.

This means any economic damage in China is likely to have consequences at home.

In September, Treasurer Jim Chalmers said China’s economy was the “number one” concern facing Australia, saying slowing in China “plays such a big role in our prospects”.

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