In the 1980s, Japan experienced an economic boom that ultimately led to a devastating recession. Today, China finds itself facing a similar downturn, with its real estate market and mounting debt as the central causes.
The Bursting Housing Bubble and Rising Unemployment:
China’s housing market, accounting for a significant portion of their GDP, resembles Japan’s real estate market before the crash in 1989. Chinese developers accumulated massive debts to build an excessive number of homes, resulting in over 23 million unsold apartments. The regulatory crackdown on bad developer debt has pushed several companies to the brink of insolvency, further impacting consumer and investor confidence. Additionally, skyrocketing youth unemployment figures and fear for the future have led Chinese consumers to save rather than spend, mirroring the situation in Japan.
Xi Jinping’s Challenges and Foreign Policy Implications:
Chinese President Xi Jinping faces overwhelming unemployment and the failure of major economic tenets, similar to his Japanese counterparts during their crisis. However, one distinguishing factor in China’s current experience is Xi’s support for Russian President Vladimir Putin’s actions in Ukraine. The war in Ukraine has disrupted China’s imports of essential commodities like food, fuel, fertilizer, and non-ferrous metals. The conflict has created a ripple effect, impacting China’s exports, especially in a recession-hit Eurozone.
Belt and Road Initiative and International Loans:
China’s Belt and Road Initiative (BRI), a signature project by Xi, aimed to enhance connectivity and economic cooperation with countries across the globe. However, a significant portion of the loans associated with BRI went to developing nations, including those battling high inflation and price hikes due to the Ukrainian conflict. The projects have stalled, and China’s loan portfolio is increasingly stacked with non-performing loans. Nearly 60% of China’s foreign loans now belong to countries in debt crises.
Impact on Local Governments and the Economy:
China’s local governments, burdened with pandemic-induced debts, face another blow as revenue from selling land to developers diminishes in the housing slump. With cuts in benefits and civil servant pay, public protests have erupted. China’s central government has promised measures to alleviate the situation, but there is no quick fix, and half of all Chinese cities struggle to repay debts. Simultaneously, foreign exchange reserves dwindle as the government supports its falling renminbi.
China’s Advantages and Reforms:
Despite the challenges, China still possesses unrivaled manufacturing supply chains, innovation centers, and a massive domestic market. However, Xi’s regulatory crackdown on private enterprises has impeded the growth of drivers of economic expansion. Economic reforms are crucial, with the private sector playing a pivotal role in restoration and innovation.
The Quest for Counter Bloc and Global Implications:
Xi’s support for Putin has caused growing divergence between China and the West, with the United States imposing export controls on transformative technologies. China seeks to build its own counter bloc, but the new additions lack significant economic substance. As China’s economic situation worsens, the repercussions will extend beyond its borders.
As China navigates its worst economic crisis since the Cultural Revolution, drawing parallels with Japan’s experience, it becomes evident that China’s housing bubble, rising unemployment, and foreign policy choices have contributed to its current predicament. The need for economic reforms, particularly in the private sector, is crucial for recovery. However, the consequences extend beyond domestic concerns, with implications for global geopolitics and economic relationships.
Market Capital Research 