Xi aims to “bring order out of chaos” by bursting China’s property bubble

Economic growth

SHARE THIS STORY

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.

One cause is that China has been producing half of all the bitcoins made in the world. And bitcoin output currently uses the same amount of electricity as The Netherlands. 

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.

After all, per capita wage income is currently just $3133/year, and 600 million people live on less than $150/month – and yet China also has more billionaires than the USA.

As I noted here last week, Xi’s aim is to abandon the land-driven development model that has skewed China’s development in favour of a wealthy few.

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:

  • 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.

PREVIOUS POST

The end of China's real estate bubble will impact global supply chains, exports and growth

26/09/2021

“How did you go bankrupt?” Bill asked. “Two ways,” Mike said. “Gradual...

Learn more
NEXT POST

An end to the China bubble would risk a Minsky moment

05/10/2021

My letter in today’s Financial Times warning of the risk to Western financial ...

Learn more
More posts
EU patience starts to run out as UK threatens to break the N Ireland Protocol
17/10/2021

Unsurprisingly, it turns out that Brexit still isn’t “oven-ready”, despite the UK ...

Read
An end to the China bubble would risk a Minsky moment
05/10/2021

My letter in today’s Financial Times warning of the risk to Western financial markets from the bur...

Read
Housing markets face long-term downturn as central banks abandon stimulus
05/09/2021

Last month saw the beginning of the end for the central banks’ 20-year experiment with stimulu...

Read
Businesses set for transformation as supply chain chaos combines with Net Zero targets
15/08/2021

‘Business as usual’ seems a most unlikely outcome as we look forward over the next 6 months....

Read
Auto industry provides a model for the transition to Net Zero
25/07/2021

Flooding in China and Europe, record temperatures in the USA, wild fires – all these are signs...

Read
Europe’s Green Deal will transform its economy, as floods confirm urgency of tackling climate change
18/07/2021

The floods raging in Germany and Benelux highlight the scale of the Climate Change challenge ahead....

Read
Governments continue to fail the Covid challenge
04/07/2021

Governments have failed to properly protect their populations from the pandemic. Some have actively ...

Read
The blog’s 14th birthday – and the New Normal world it predicted has arrived
27/06/2021

The blog has now been running for 14 years since the first post was written from Thailand at the end...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more