As Western countries teeter on the brink of a potentially devastating recession next year, China is also facing a recession thanks to a “total collapse” of confidence among ordinary people in its once-booming housing market, the continuing ravages of Beijing’s draconian zero. Covid strategy and an extreme heat wave affecting energy and food supply. Alarm is spreading in China that tough times are on the horizon, with Huawei chief executive Ren Zhengfei causing a sensation this week when he warned that the chill from the economic downturn would be “felt by everyone” for the next decade. President Xi Jinping arrives for the opening session of the Chinese People’s Political Consultative Conference in March in Beijing. Photo: Carlos García Rawlins/Reuters But just as it has become impossible for President Xi Jinping to reverse the mass lockdowns that have curbed economic activity, it also looks increasingly unlikely that he and his Politburo will reverse the crackdown on reckless lending in the property market that led to a 40% plunge in home sales this year. China’s housing market has driven growth over the past two decades and now represents the world’s largest asset class, with a notional value of between $55tn (£47tn) and $60tn, larger than the entire stock market US market. Now developers are collapsing after being cut off from easy credit, prices are falling, homeowners are refusing to pay mortgages on unfinished homes, and a slump in real estate sales and construction is crippling local governments that rely on land sales for income. A woman rides a motorbike next to a construction site in Beijing this month. Photo: Wu Hao/EPA Gabriel Wildau, a China specialist at global consultancy Teneo, says Beijing faces a tough time over whether to reverse its lending crackdown or redouble its efforts to “tame the beast” of unproductive manufacturing activity that it resulted in the appearance of ghost towns and airports, as well as roads to nowhere. “The government is facing a difficult choice. But it’s like zero Covid. They’ve come so far that they can’t turn back because then it looks like a misjudgment or a policy mistake,” Wildau said. “This is where the rubber hits the road. They want more high-tech development and they don’t want as much real estate, but what’s replacing that? There was a complete collapse of confidence in the housing market. No industry can survive that.” The drive to revive the economy was the focus of a massive package of measures unveiled by Beijing last week, including 300 billion yuan (£37 billion) in new infrastructure spending and an extension of 500 billion yuan worth of lending to local governments. Economists said the stimulus was expected and may not have much of an impact on an economy already flush with investment funding. What is needed, they say, is for Chinese households to have more cash on hand to rebalance the economy away from the tired old investment model. However, such policies are politically difficult because they threaten the established order of powerful party officials, centralized state-owned enterprises, and local government shutters. An unfinished skyscraper in Tianjin, China. Photo: Anadolu Agency/Getty Images Wildau says Beijing has the money and technocratic know-how to bail out the property sector, but it would be “very expensive”. So far it seems that Xi, despite the chaos that has been unleashed, is sticking to the plan to eliminate excesses and ensure that “houses are for living” and not for profit. So far China’s export industries have held up well and, despite trade wars and lockdowns, the country has actually increased its share of global output since the start of the pandemic. Even that, however, is at risk because demand from around the world looks likely to fall off a cliff in the next 12 months in a feedback loop that carries more risks for China. Vehicles waiting for shipment at Yantai Port, Shandong Province. Photo: VCG/Getty Images As Ren’s comments on the outlook for Huawei highlighted, it’s not just China that faces uncertainty. Curtailing Russian gas supplies and Western sanctions imposed over its invasion of Ukraine are fueling inflation and holding back growth, threatening a bleak winter for developed economies from the US to Europe and from Japan to South Korea. The worst cost-of-living crisis in nearly 50 years is slowly engulfing Western nations and this looks certain to lead to reduced demand for Chinese-made goods as households must focus on essentials such as food and fuel. On Friday, Federal Reserve Chairman Jerome Powell rattled markets by saying there would be pain for households and businesses as he signaled the central bank would keep raising interest rates until inflation is beaten. Subscribe to Business Today Get ready for the business day – we’ll point you to all the business news and analysis you need every morning Privacy Notice: Newsletters may contain information about charities, online advertising and content sponsored by external parties. For more information, see our Privacy Policy. We use Google reCaptcha to protect our website and Google’s Privacy Policy and Terms of Service apply. Falling external demand is the “next shoe to drop” for China, according to David Llewellyn-Smith, chief strategist at investment and asset management firm Nucelus Wealth in Melbourne, and will leave China in a precarious position. “The private sector is being hammered by Omicron, the external sector is being hammered by global weakness, and the public sector is doing its best to relax but is facing various hold-ups in fiscal policy. It is a very toxic combination for China. Very difficult to manage,” he says. “A Chinese recession is absolutely in the cards next year. This will have an incredible impact on global markets of all kinds.” A child wearing a mask runs through an art installation in a shopping mall in Beijing. Photo: Ng Han Guan/AP How the world feels about the chill Wren warned about is not clear, but it adds an unknown factor to an already dangerous mix of issues, says Roland Rajah, the chief economist at the Lowy Institute, an Australian think tank. These include: increasing geopolitical instability; fragile supply chains. political dysfunction in the US; digital disruption; and the accelerating effects of climate change. The challenges have even prompted the French president, Emmanuel Macron, to join the bleak predictions, saying we are seeing the “end of plenty”. Back in the global financial crisis of 2008-09, China led the rescue of the global economy with a 4tn yuan stimulus. But with Beijing in the process of disengagement from the Western-led world order and debt-led growth in disfavor, another Chinese bailout seems highly unlikely. Instead, China is facing Japan-style “lost decades” as it tries to absorb billions of dollars in stupid real estate loans. “In the short term China’s economy is getting hammered,” says Rajah. “It remains to be seen what the medium to long-term consequences could be. But China also faces very significant long-term headwinds from demographic decline and aging, creeping statism and its increasingly difficult foreign relations.” And as China reaches the impasse of the housing crisis, the global economy itself is also at a crossroads. “The global economy seems to be at an inflection point,” says Rajah, “although it’s also in a state of flux, when things could still go in any number of directions. People need to prepare for a much more uncertain world, but we also need to expect much more from our politicians and policy makers, because the need for wise policy is ever greater.’
