China is at the start of its biggest economic shake-up since 1978, when Deng Xiaoping launched his post-Mao reform programme. President Xi Jinping’s ‘Common Prosperity’ policy aims to retain his focus on increasing living standards. But it wants to spread the wealth far more widely.
The electricity rationing now underway across China highlights the need for reform, as the ICIS chart shows.
This highlights how some people in China are getting very rich, whilst others are without lights or heating. Unsurprisingly, bitcoin mining was banned last week.
This is the background to his new policy. As the People’s Bank of China and other regulators insisted again last week:
“Housing should never be used as a short-term stimulus for economic growth”.
This is a complete reversal of the post-2008 position. It seems likely to have at least 4 main impacts on China and the global economy:
- Evergrande’s future. Evergrande has 778 projects underway in 223 Chinese cities, and has been frantically selling off apartments with 30%-40% discounts to try and raise cash. Beijing will protect domestic homebuyers – probably by allowing unfinished apartments to be taken over by local governments. But it is unlikely to rescue foreign investors in the $221bn offshore dollar market – where Evergrande’s $20bn of loans makes it the largest borrower (9% of loans, and 12% of high-yield loans).
- China’s property market. This is 29% of China’s GDP. And it has been ‘subprime on steroids’ since the stimulus policy began in 2009. As a result, China accounted for 28% of global growth in 2013-18 according to the IMF. Today, as the chart shows, its house prices are the highest in the world on the basis of price/income. Worryingly, much of the building has been speculative. It now has enough empty property to house 90m people – more than the population of major countries such as France or Germany. Xi has been saying since 2017 that “houses are for living in, not for speculation”. And sales in the 52 largest cities are already in a tailspin – down 20% in August and 16% in the first half of September. This is the real threat to the global economy, as China’s demand dries up.
- China’s auto sales. One area at major risk is the car market. As in the subprime US economy in 2003-8, China’s stimulus policy has powered a dramatic rise in sales, which rose over 400% between 2008 – 2017, as people spent their speculative property gains. Yet the other 6 main markets are still below 2008 sales levels, as the chart shows. This bubble may also burst, as not many people can afford a new car – or Louis Vuitton bag – on an income of $3133/year. The coming real estate downturn will create a major shift in consumer buying patterns as discretionary spending reduces.
- China’s local government income. Local governments have $8.4tn of debt and depend on land sales for 1/3rds of their revenue. These sales fell 90% in the first half of September. Their debt has risen 400%+ since stimulus began in 2009, and is now 44% of China’s GDP. So they may well default if land sales continue to collapse. Already, much of the debt is having to be refinanced, creating a serious headwind for future growth. Rolling defaults on this spiralling, and often hidden, local government debt will likely have a major impact on jobs and the economy as they cut spending.
Xi’s policy shift has already wiped out $bns of value in China’s tech and education sectors. Now, with the bursting of the real estate bubble, he is moving to the next stage of his Common Prosperity reforms. These will have a major impact on the global economy.
As the chart shows, China’s stimulus meant it has become the largest consumer of most industrial commodities – as well as plastics as my colleague John Richardson notes. And so now, as China’s demand for them slows, other countries will find their economies slowing in a vicious circle.
Xi’s policy shift aims to ‘bring order out of chaos’, and echoes Deng’s ‘boluan fanzheng’ policy after the chaos of the Mao years. If he succeeds, China’s economy is likely to become much more sustainable. But in the short-term, the bursting of the real estate bubble will likely be very painful for China and the global economy for the next few years.