Key takeaways from China’s mortgage crisis
China’s economy has done surprisingly well through the Covid period – until now. Throughout the Covid period China has sustained growth through investment and exports. In the midst of a weak global economy, exports rose 14 percent YoY in 1H 2022, and in 2021, China’s total trade was up 30 percent as the western economies chased hard goods. Total trade is likely to increase 20 percent in 2022, according to CSIS economist Nicholas Lardy. Western profits of companies such as German BASF enjoyed a 42 percent growth in revenues in 2021 but have since declined, falling “off the cliff” in April and May, according to BASF China representative Joerg Wuttke.
The bank runs in Henan and the mortgage protests are signs of a sharp decline in economic activity and confidence, partly in the country’s largest driver of economic growth – property. The current crisis is partly self-inflicted; China’s Three Red Lines policy launched in 2019 forced many developers to shrink balance sheets. The Covid lockdowns were a policy choice, although they may reflect worries about inadequate hospital capacity. Last, the reduced growth in total social financing is a policy choice – but has been instituted in light of China’s historically high debt to GDP of around 350 percent. (As an aside, Peking University economist and Dean Yao Yang has recently called for an end to the Three Red Lines).
China is now struggling with handling an economic downturn, the Covid policy, and likely shrinking demand for exports. Large stimulus through the banking system is not on the table due to the country’s high debt load. This includes high mortgage and developer debt in the crucial property sector. Beijing is trying to back away from high leverage without causing a crisis.
In this report I analyze the long-term impact of both China’s policies and its macroeconomic environment.
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