China’s real estate market is collapsing. Earlier this year, Hengda Group was forced into liquidation with $300 billion in debt. There are about 90 million empty apartments in China, many of them in sparsely populated “ghost cities.” Other Chinese real estate developers, such as Biguiyuan and Fantasia Holdings, are also experiencing crises. China’s growth is slowing. Factory activity in China fell for the fifth straight month in September, and the International Monetary Fund (IMF) pointed out that China’s long-term growth rate is currently falling from more than 10% in 2010 to less than 4%. Japan’s growth rate similarly slowed in the 1990s. Last month, China introduced a large-scale stimulus package that lowered interest rates, mortgage rates, and bank reserve ratios. Thanks to this, the Shanghai Composite Index rose by about 25%. Afterwards, the stock market fell about 8% again amid criticism that it did not meet expectations.
Stimulus measures alone are not enough
Japan has also tried to stimulate its economy with monetary and fiscal stimulus measures for decades. However, Japanese banks were filled with bad loans, and instead of writing off bad loans, they stopped making new loans to make them look good on paper, turning them into ‘zombie banks.’ Is China following Japan’s path? The value of China’s 90 million empty apartments is estimated at $18 trillion. These loans amount to trillions of dollars and are going bad. Officially, China’s non-performing loan ratio is only 1.6%, which is an incredible figure.
The reassuring news is that China’s domestic savings rate is high. Maybe you can afford to take on bad loans. However, the Chinese economy is still dominated by low-profit, low-productivity state-owned enterprises. Due to the now-abolished one-child policy, China is under the ‘curse of aging’. Highly productive companies could be the solution, but the Chinese government is crippled by regulations in the finance, trade, and gaming sectors. Moreover, unlike Japan in the 1990s, China is not rich. Gross domestic product (GDP) per capita is still lower than that of Mexico. It is unclear whether the Chinese economy will be able to handle the high tariffs that the United States and the European Union (EU) will impose on Chinese products.
‘Lost 10 years’ Ona
The Chinese government also has a lending problem. The government debt to GDP ratio is close to 85%. Private non-financial debt amounts to 205% of GDP. Of this, dollar-denominated debt is approximately $1.1 trillion. China is intentionally trying to abandon the US dollar. China’s holdings of U.S. Treasury bonds, which peaked at $1.32 trillion in 2013, decreased to $776 billion in July this year. If you think back to the global currency crisis of 1997 and 1998, Korea, Thailand, Indonesia, and even Russia had no way to repay their loans due to dollar-denominated debt and the collapse of their currencies. To protect against a collapse in currency value, you must hold US dollars. Instead, China is stockpiling gold, oil, and copper. Some see this move as a precursor to China’s currency devaluation to revive slowing export growth. This could cause chaos in global markets and trigger capital flight from China.
Yale University professor Stephen Roach pointed out, “China’s growth rate may be unacceptably slow, and no matter how much it saves, it cannot escape the same structural problems as Japan.” Xi Jinping is a Marxist ideologist who calls for ‘shared prosperity’ and ‘Chinese unique socialism’. This cannot solve the structural problem. A ‘lost decade’ may begin in China like in Japan. Capitalism without democracy is not capitalism after all.
Original title ‘China Is Turning Japanese’
