In the capital city of Beijing, the Chinese Communist authoritarian regime is grappling with the harsh reality of self-inflicted economic struggles.
The ongoing real estate crisis in China presents a significant challenge to the Communist Party, with industry giants like Evergrande and Country Garden facing liquidation orders. Chinese citizens heavily were invested in real estate, with approximately 70 percent of their investments allocated to this sector, twice the amount seen in the United States.
The long-term real estate fundamentals have changed — China’s population has likely peaked, urbanization is slowing and home ownership is already very high.
Moreover, official economic figures released by the People’s Republic are often met with skepticism from experts, who believe gross domestic product (GDP) numbers are fantasy. For example, Foreign Policy reported that China’s economic growth in 2023 may have been significantly lower than the stated 5.2 percent, possibly around 1.5 percent.
China’s overall debt-to-GDP ratio is about 300% and rising, which is the highest among emerging markets and higher than most advanced economies. While China’s central government debt is relatively small at just above 20% of GDP, debt at the local government level is estimated to be more than 70% of GDP.
A debt crisis is typically a liquidity crisis
Additionally, China’s government has substantial assets that can help pay debt. More importantly, a debt crisis is typically a liquidity crisis, and in the case of China, high domestic saving kept by capital controls at domestic banks means that more than 95% of China’s debt is domestic debt, financed by relatively stable domestic deposits and not subject to sentiment change of international investors.
Despite the Chinese Communist regime’s message of China being “open for business” to the global business community and financial elites, the reality paints a different picture. Beijing’s autocratic government enacted a draconian law that requires domestic and international companies operating in China to share business secrets and intellectual property with the Communist Party. This policy has raised concerns about the country’s investment and business environment. While the intention behind such measures may be national security and autocratic control related, it also poses challenges for companies operating in China.
Bottomline, the Chinese economy is plagued by a litany of challenges.
Local governments are struggling with financial difficulties after three years of pandemic spending and declining land sales. Some cities in China can’t repay their debts and have hadto cut basic services or reduce medical benefits for seniors.
The real estate crisis has deepened. Plunging home sales have pushed developers like Country Garden to the brink of collapse. The crisis has spilled over to the massive shadow banking sector, causing defaults and sparking protests across the country.
Youth unemployment has become so bad that the government stopped publishing the data.
Foreign companies have grown wary of Beijing’s rising scrutiny and are pulling out of the country. In the third quarter, a measure of foreign direct investment (FDI) into China turned negative for the first time since 1998.
Foreign investors beware when investing capital in an communist and autocratic country.
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China is in trouble economically, socially, and demographically. In contrast, the U.S. economy is thriving