China's economic challenges gather steam as new loans plunge, property fears loom (2024)

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China's economic challenges gather steam as new loans plunge, property fears loom? ›

China's economic challenges gather steam as new loans plunge, property fears loom. Credit data for July released Friday showed a slump in demand from businesses and households to borrow money for the future.

The root cause of China's present economic problems is the highly unbalanced economic model that it has pursued over the past 30 years. Not only did China excessively rely on investment in general and on housing investment in particular to drive economic growth.

The collapse of Evergrande, once the world's most valuable real estate company, marked the beginning of China's real estate crisis. Founded in 1996, Evergrande targeted the upper-middle class, but excessive borrowing and overbuilding led to its downfall.

In China's domestic market, overcapacity issues have provoked a brutal price war in some industries that is hampering profits and devouring capital. According to government statistics, 27 percent of Chinese automobile manufacturers were unprofitable in May; at one point last year, the figure reached 32 percent.

Real estate and related sectors once accounted for about one fifth or more of China's economy, depending on the breadth of analysts' calculations. The property industry has slumped in the last few years after Beijing's crackdown on developers' high reliance on debt for growth.

Despite these robust economic performances, China's economy faces significant challenges including declining property investment, accumulating debt risk and weak consumption growth, all of which pose downside risks to China's growth trajectory in the near term.

Unlike the Global Financial Crisis (GFC), the impact of China's property slowdown on households is limited. China's household debt-to-GDP ratio is 61.4% in 2022, a moderate level globally. Only half of the Chinese household debt is property-related, and mortgage loan growth has decelerated.

Since the property market began its steep downturn in 2021, a string of developers have defaulted, leaving scores of idle construction sites behind, and sapping confidence in what had for decades been the preferred savings instrument for the Chinese population.

The outstanding debt is estimated to be CNY 60 trillion (USD 8.9 trillion), or nearly 50% of 2022 GDP. Of that, home mortgage loans account for 65% and corporate debt for 35%. The relatively high down-payments that homeowners need to make should help contain large-scale mortgage defaults.

Is China struggling on economy? ›

Now, China's current leadership is facing an ongoing real estate crisis, you've got slowing growth and income, and a low fertility rate, among other things. On top of that… many Chinese may not be as hopeful about their futures right now.

Debt as a share of GDP has risen to about the same level as in the United States, while in dollar terms China's total debt ($47.5 trillion) is still markedly below that of the United States (close to $70 trillion). As for non-financial corporate debt, China's 28 percent share is the largest in the world.

Beijing threatens the world's economy and public health by unsustainably exploiting natural resources and exporting its reckless disregard for the environment via BRI.

China's once-thriving housing market is in turmoil, with the crisis triggered by a liquidity crunch that severely impacted developers, notably the Evergrande Group. The sector's previous growth, driven by speculative investment and excessive borrowing, has given way to a stark reality of financial instability.

China holds only about 1% of all foreign-owned land in the United States, while Canada owns nearly a third. Canada holds 31% of all foreign owned land, with the Netherlands and Italy following with 12 and 7% respectively. China owns a small fraction, just about 1%, while other countries own 28%.

Funding for developers has stayed weak even after the government drew up a “white list” late last year of property firms that are eligible for loans. A broad gauge of financing for builders, including loans, bonds and proceeds from home sales, shrank 23% from a year earlier, separate data showed Monday.

China's economy is experiencing an uneven recovery after an extended weak period but continues to face fundamental challenges. Consumer demand is lagging, and the property market is hurting. Emerging market stocks made a solid recovery in the second quarter, despite these challenges.

Domestic trade, privatization and investment are driving China's economic growth. Foreign trade has surprisingly little effect on economic growth (per capita GDP). Railways negatively affect less-developed provinces. China's government has to get better at distributing the benefits of GDP growth to its citizens.