A growing crisis is threatening China’s economy. The Chinese Communist Party’s (CCP) draconian “zero COVID-19” policy has caused the country’s economy to atrophy: This year’s second-quarter GDP increased by only 0.4 percent, data released by Beijing showed, making it inevitable that the CCP would miss its target of 5.5 percent growth this year.
Outside of the macroeconomic situation, the country’s banking system has been shaken by multiple serious cases of fraud involving rural banks in Henan Province. Forty billion yuan (US$5.94 billion) of client deposits have disappeared and withdrawals from their accounts have been frozen, revealing regulatory failures and a dark side to banking in rural China involving collusion between banks and criminal gangs.
An even more serious problem is a real-estate crisis emerging across the country and engulfing 25 provinces. Scores of home buyers are refusing to pay mortgages on unfinished residential projects, abandoned by heavily indebted developers that have run out of credit. The situation has exposed the extent to which China’s economy is reliant on real estate to maintain growth, a market which has become a gigantic Ponzi scheme.
If China’s real-estate bubble pops, it would send the country’s economy into a severe slump, dragging down with it the livelihoods of tens of millions of people, with far-reaching implications for societal and political stability in the country.
Having barreled along at breakneck speed for more than four decades, China’s economy is clearly in serious trouble. In reality, this crisis has lain dormant within China for a long time, but Beijing has repeatedly papered over the cracks with huge injections of monetary and fiscal stimulus, as well as currency manipulation, to keep the plates spinning.
Starting with former Chinese leader Deng Xiaoping (鄧小平), the primary means by which the CCP has derived legitimacy is the provision of double-digit percentage economic growth. It was inevitable that China’s extended run of manic expansion would eventually run out of steam. It is a classic example of the “middle income trap.”
Some nations overcome this obstacle with democratic and structural reforms to become wealthy, enlightened societies. Others fail to surmount the hurdle and stagnate, because they failed to build transparent institutions, and did not introduce checks and balances on executive power and regulatory mechanisms. As a consequence, such countries fall into the abyss of corruption and dictatorship, and their economies decline.
This is the existential challenge that China is facing. The only way that the country will break free from this trap is by enacting structural reforms, both economic and political.
If, on the other hand, Beijing pushes on with its “digital dictatorship” model and continues to try to solve problems such as the COVID-19 pandemic and the economy using ideology and its own version of political correctness, while simultaneously pursuing hegemonic expansionist policies abroad, it will suffer a relapse of its former fiscal disease that could lead to “multiple organ failure” and eventual economic collapse.
Some of China’s economic woes stem from the CCP’s ideological framework, while others originate from the adoption of an incorrect growth strategy. Both causes — party ideology and a poor growth strategy — are equally to blame, and sowed the seeds of China’s economic collapse.
Analyses of China’s “economic miracle” almost always attribute its genesis to Deng’s “reform and opening up” policy.
However, “reform and opening up” meant nothing more than adopting capitalist tools to suck in foreign investment, technology and talent to stimulate economic development.
Enacting genuine structural reforms, such as free-market mechanisms, material and intellectual property rights, or enacting systematic reforms that introduce democracy, diversity and openness to the country’s political system, were always off limits.
The model adopted by Deng has shackled China to a path that will never lead to the development of a genuine market economy. For this reason, the CCP is forced to use labels such as “state capitalism” and “party-state capitalism” to describe its Frankenstein economic model.
Just as Chinese President Xi Jinping (習近平) is preparing to anoint himself emperor for life, China’s “socialist market economy with Chinese characteristics” has finally revealed its ugly self. The party is advocating a revival of the state sector and communism under slogans such as “the state advances, the private sector retreats” and “common prosperity.”
In practice, this means that the dead hand of the party will begin to assault the private sector, covertly appropriating private enterprises and assets. This would inevitably throttle China’s innovative and dynamic private sector, and is tantamount to tossing Deng’s (albeit flawed) “reform and opening up” policy into the dustbin of history.
In addition to these structural problems generated by the CCP’s Marxist-Leninist ideology, China’s real-estate market is also on the brink of collapse, which, by contrast, is a classic symptom of having pursued an inappropriate growth strategy.
The CCP never misses an opportunity to flaunt China’s rapid GDP growth. Unable to rely on the manufacturing industry alone to sustain this high-speed expansion, the party discovered that the real-estate market was a treasure trove of limitless expansion.
The vast number of property developments, credit and the associated jobs needed to finance and supply a construction boom could be harnessed to artificially inflate China’s economy and keep the show on the road.
At the same time, the booming real-estate market could also be used to finance China’s local governments, which rely on land sales to meet one-third of their spending commitments. By allowing local governments to engage in uncontrolled construction sprees, as though they were planting magic money trees, China has ended up with a glut of outwardly impressive, but utterly superfluous, infrastructure, which functions only as a means for promoting local party officials.
China’s real-estate sector accounts for about 30 percent of its GDP growth, while about 70 percent of family wealth is tied up in that market, creating the perfect recipe for a bubble.
The dire nature of the situation became apparent last year when it was revealed that China’s 10 largest developers were sitting on a combined debt mountain of 10.5 trillion yuan. Struggling under the weight of unsustainable obligations, Chinese home builders experienced an explosive wave of mortgage defaults on a scale exceeding that of the 2007 US subprime mortgage crisis.
Meanwhile, the problem of unfinished construction projects continues to smolder in the background, exacerbating the situation and guaranteeing an even greater reckoning when the bubble eventually bursts.
The phenomenon of unfinished construction projects is created by the way Chinese developers pre-sell properties before the first drop of cement has even been poured.
Developers typically use the first payments — enticed from home buyers with heavily discounted prices for signing on early — to purchase the land for projects, which they then use to attract more buyers, whose down payments are used to finance subsequent phases of the project.
During a booming economy, this model lets developers rake in extravagant profits, but there has been insufficiently rigorous government regulation and scrutiny into the financial underpinnings of home builders. As a result, whenever the real-estate market experiences a rapid drop in prices and a slump in sales, developers are left with insufficient funds to complete projects already in progress, creating scores of half-finished abandoned apartment blocks across the country.
Buyers who bought into an aborted project, have to take out loans to afford their down payments. While under pressure to make mortgage payments, the majority are also paying rent, creating an enormous financial burden.
These victims of abandoned housing projects have en masse begun to refuse to pay their mortgages, as the home they bought is either half-finished or does not even exist.
Some analysts have estimated that there are as many as 20 million people who bought into unfinished residential construction projects and are living in partially completed homes, many of which have no water or electricity.
Colloquially known as lanweilou (爛尾樓, “rotten tail buildings”), the people residing in the homes, which are likely in a wretched state, are living in substandard conditions.
The phenomenon of unfinished construction projects has had a knock-on effect on China’s banks. Property developers have defaulted on their loans, while homebuyers are refusing to pay their mortgages, creating a perfect storm for China’s banks and a financial crisis on a scale far greater than the US subprime mortgage crisis.
The CCP is fond of reminding China’s downtrodden that “without the communist party, there would be no ‘New China’” — which is the title of a patriotic song created by the party, and is used as an excuse to justify the regime’s control of every aspect of society.
However, the economic glow of the CCP’s “New China” is fast losing its luster. The outwardly impressive dense rows of skyscrapers, which form the skyline of every Chinese city and town, are rotting on the inside; many are empty carcasses.
Whether it is households in Henan unable to withdraw savings from their bank accounts or the decaying lanweilou peppering China’s landscape, all of this is having a significant effect on the livelihoods of ordinary Chinese, many of whom have seen a lifetime of hard work go up in smoke as they struggle to make ends meet.
Many of these victims of the CCP’s epic mismanagement of China’s economy have nothing to fall back on. The iron fist of the party would likely have a limited effect on them, as they now have nothing to lose.
The CCP appears to be on the brink of a major crisis caused by a double whammy of losing economic control and its mandate from heaven to rule over the “Middle Kingdom.” This is the specter that will be haunting the CCP leadership when they go to bed each night.
Translated by Edward Jones
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