“Global Sentiment Turns Negative Regarding China’s Economic Outlook”

Doubts Grow Among Investors and Chinese Public Regarding Beijing’s Capacity to Avert a Substantial Downturn in the China Economy

Increasing Global Apprehension over China’s Economic Situation Intensifies as Disturbing Data Emerges; Chinese President Xi Jinping Undertakes South Africa Visit, Omitting Anticipated Address at Annual BRICS Summit; Harsh Impact of Economic Decline Felt by Chinese Homeowners and Labor Force

Concerns Arise Over China’s Economy

Amidst a series of unfavorable developments, concerns about the Chinese economy have rapidly intensified in recent weeks. The situation hasn’t been helped by the government’s clumsy attempts to obscure data. Recent data, including retail sales and exports from the previous month, paints a dismal picture. August witnessed the failure of a prominent real estate developer and a sizable financial management firm to meet debt obligations. Additionally, the central bank of China has reduced a key interest rate.

While the likelihood of a “Lehman moment,” where a major corporation’s collapse triggers a catastrophic domino effect, is low for China, thanks to the government’s interventionist approach, worries persist. The government has consistently prevented such collapses through established bailout strategies. Yet, the current economic challenges—ranging from a crumbling real estate sector to an undetermined extent of local government debt crisis—aren’t novel; they’ve been simmering beneath the surface for years.

What’s novel is the waning confidence of investors in the Chinese government’s capability to avert or mitigate a substantial economic downturn, coupled with the potential surge in deflation. For a long time, the belief in the “China miracle” of unending growth, combined with the vast and intricate nature of the Chinese economy, fostered misplaced trust in the nation’s political leadership. Regrettably, that trust has now eroded.

China’s Economy Faces Potential Decade of Slowdown Amidst Dwindling Trust in Government

The current year’s economic slowdown in China is no longer viewed by global investors and analysts as a mere hiccup resulting from a weak post-COVID-19 recovery. Instead, it’s seen as a possible prelude to a lost decade for the country. Such concerns are echoed by the Chinese public, stemming from a broader erosion of trust in the government. This mistrust is fueled by Chinese President Xi Jinping’s increasing autocratic rule, marked by the removal of term limits in 2018, and the mishandling of China’s COVID-19 policies in the previous year.

Amid the economic challenges, Xi has notably retreated from public visibility, presumably secluding himself at the Beidaihe retreat of the Chinese Communist Party. Adding to the apprehensions, he traveled to South Africa for the annual BRICS summit—the first in-person gathering since 2019—yet delegated his speech to a substitute after a lunch with South African leaders. Speculation persists about potential leadership dynamics behind the scenes, although the possibility of Xi’s illness, an admission rarely made by Chinese leaders, is also plausible.

The concerns surrounding China’s economic state have spurred discussions on the ongoing crisis. Notable perspectives include Adam Posen’s exploration of its implications for U.S. geopolitics, Li Yuan’s detailed examination of the Chinese business sentiment, Noah Smith’s structural breakdown of the crisis, and Lingling Wei and Stella Yifan Xie’s analysis of a fractured economic growth model.

However, a less-highlighted factor contributing to the shifting sentiment is the recent crackdown by the Chinese government on the healthcare industry. Following cues from central leadership, multiple provinces have initiated anti-corruption efforts aimed at hospital managers, as well as connections between physicians, private providers, and the pharmaceutical sector. For some investors, this crackdown appears to be the tipping point. On August 7 alone, news of the crackdown caused a loss of $27.4 billion in value for prominent healthcare stocks.

This development was particularly surprising, given the cautious but ultimately misguided optimism among investors that the wave of regulatory crackdowns, which began in 2020 and resulted in a $1.1 trillion decline in the value of China’s technology sector alone, had subsided. The belief that China’s leaders would prioritize growth over politics lacked support from actual governmental actions or rhetoric. The healthcare crackdown had an additional impact since the sector had been touted for years as a significant avenue for foreign investment.

Yet, China’s healthcare sector is plagued by corruption and in need of reform. Despite improvements in the health insurance system, most costs are still borne by patients. While many hospitals are publicly owned, they function as profit-driven entities within a state-controlled framework. Apart from a brief period during the pandemic when they were hailed as heroes, doctors are generally unpopular and distrusted in China. Their training often falls short of global standards, and even experienced doctors earn less than $15,000 annually on average, often relying on kickbacks for supplementation.

The healthcare campaign exemplifies the government’s current dilemma: numerous sectors necessitate reform, but a cautious and systematic approach is imperative. In the prevailing political climate, forceful crackdowns are the norm. While China might find a path to navigate the economic crisis, doing so will demand a level of skill and adaptability that Xi’s administration is likely lacking.

Xi’s Absence Raises Concerns at BRICS Summit Amidst Complex Dynamics

Chinese President Xi Jinping’s decision to forego his scheduled speech at the BRICS summit in Johannesburg, South Africa, has left observers surprised, particularly given the significance China had attributed to the event. Furthermore, uncertainties linger over Xi’s anticipated meeting with Indian Prime Minister Narendra Modi on the summit’s sidelines. BRICS, a group whose name was originally coined using Goldman Sachs terminology, represents an intriguing assemblage. While China saw the term as a way to convey unity among non-Western nations, real-world relations tell a different story.

An examination of the relationships between China and other BRICS members reveals a complex web. Russia maintains a quasi-formal alliance with China, with the latter offering economic support and possibly technological aid during the Ukrainian conflict. South Africa has historical ideological ties with China, as the Chinese Communist Party supported the African National Congress during its struggle for freedom. India views China as a threat and frequently engages in border disputes, while Brazil’s alignment tends to shift based on its leadership. These dynamics hardly form a sturdy foundation for a cohesive global bloc.

Camp David Summit Offers Lessons

The recent summit hosted by U.S. President Joe Biden brought together leaders from Japan and South Korea—an unprecedented event for two countries with a history of strained relations. The summit was significant due to historical animosities, including Japan’s harsh occupation of South Korea, disputes over unresolved issues such as compensation for “comfort women,” and past bans on Japanese cultural products.

Surprisingly, China now faces less popularity than Japan in South Korea due to Beijing’s support for Pyongyang and the environmental impact of Chinese factories on South Korean soil. This shift, along with the arrival of a more conservative South Korean administration, has prompted Tokyo and Seoul to move closer, with some influence from Washington. Collaborative agreements between the two nations are not solely aimed at countering North Korea, but also at addressing the rise of China. Predictably, Beijing has expressed its objections to these developments.

Impact on Chinese Homeowners and Young Workers Amid Economic Downturn

Central to China’s ongoing economic turmoil is the oversized real estate sector, estimated to contribute up to 30 percent of the country’s GDP, a figure notably higher than the United States’ 17 percent. The urban upper-middle class, forming the foundation of support for the Chinese Communist Party (CCP), holds substantial investments in real estate. Many of these individuals are long-term residents of major cities where government-owned properties were transferred to private ownership from the old danwei housing system in the 1990s, subsequently experiencing significant value appreciation.

The upper-middle-class property owners, often individuals who migrated to China’s urban centers as they expanded and secured properties with family loans, operated under the assumption that property values would perpetually rise. This anticipation influenced their financial planning. Consequently, the government is reluctant to allow housing prices to decline, although prices may have fallen more than official records indicate. Local governments have instructed real estate firms not to reduce prices significantly, as acknowledging a substantial devaluation could potentially trigger a broader crisis of confidence among property owners, even those not actively trying to sell.

However, maintaining artificially elevated prices has led to stagnant property inventory, as developments remain unoccupied. Residential sales plummeted by 43 percent in July, exacerbating local government financial difficulties that heavily rely on land sales to real estate companies.

The Impact on Young Workers

While homeowners are grappling with concerns, the ramifications of the economic slowdown could be even more dire for the impoverished and the young. Youth unemployment statistics have soared to 21.3 percent, potentially even higher, as the government has ceased publishing data on the matter. Narratives from recent graduates paint a somber picture, with many resorting to manual labor jobs in factories.

Surprisingly, over 40 percent of Chinese youth do not pursue higher education. The real estate industry has historically leaned on migrant labor from rural areas, and the decline in new construction has resulted in job losses. These migrant workers are transitioning to the service sector instead of manufacturing, generating a peculiar labor shortage, often in locations where graduates are disinclined to settle. Earnings appear to have decreased since the pandemic, with numerous migrants expressing difficulty in finding a livable wage in once-thriving regions.

What is the key factor at the center of China’s ongoing economic crisis?

he bloated real estate sector is a major factor in China’s current economic crisis, constituting as much as 30 percent of the country’s GDP.

What percentage of GDP does the real estate sector contribute to China’s economy compared to the United States?

The real estate sector contributes around 30 percent of China’s GDP, significantly higher than the 17 percent it contributes to the GDP of the United States.

How has the urban upper-middle class in China become heavily invested in real estate?

The urban upper-middle class, which is a core support base for the Chinese Communist Party (CCP), became deeply invested in real estate due to properties being transferred from government ownership to private hands in the 1990s, resulting in substantial value appreciation.

Why is the Chinese government reluctant to allow housing prices to fall?

The Chinese government is hesitant to let housing prices drop significantly due to concerns about causing a crisis of confidence among property owners, even those who are not actively selling their homes.

How has the economic downturn affected residential sales in China’s real estate sector?

Residential sales in China’s real estate sector experienced a significant drop of 43 percent in July, contributing to local government financial challenges that depend on land sales to real estate companies.

What is the unemployment rate among Chinese youth, and why might it be higher than officially reported?

The unemployment rate among Chinese youth has reached 21.3 percent, but it could be even higher, as the government has ceased publishing data on this matter.

How has the economic slowdown affected recent young graduates in China?

Many recent young graduates in China have had to take up factory jobs due to the impact of the economic slowdown.

How has the real estate sector historically relied on labor from rural areas?

The real estate sector in China has traditionally depended on migrant labor from rural areas to fulfill its workforce needs.

Why are migrant workers shifting from manufacturing to the service sector in China?

Due to the decline in new construction and changes in the economy, migrant workers in China are transitioning from manufacturing to the service sector.

What challenges are migrants in China facing in terms of wages and living conditions?

Migrant workers in China are reporting difficulties in finding a living wage in areas that were once prosperous, with salaries appearing to have decreased since the pandemic.

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