The era of China’s rapid economic growth is a thing of the past. The second largest economy in the world found herself on the verge of a deep crisis due to the collapse of a giant immobile bubble. Beijing’s former ambition to surpass Washington as the world’s leading economy looks increasingly bleak: these ambitions may be delayed for decades or may prove unattainable.
China’s economy on the brink: How the real estate crisis is affecting global markets
The real estate sector, which for a long time was the driver of economic development, has turned into a problem. Major developers Country Garden and Evergrande are experiencing a serious crisis. The latter, with a debt of more than $300 billion, was forced to declare bankruptcy in the United States due to unsuccessful investments and excessive debt. Many smaller developers are also on the edge of survival, and the housing market as a whole is unprofitable.
Over the past nine years, housing prices in China have been falling at a record pace due to declining demand. Buyers are losing confidence in the market due to financial risks and unfinished construction projects. In conditions where real estate is no longer a safe investment, the market plunges into a deep crisis.
Household debt reached 63.5% of GDP, approaching the critical limit. At the same time, the number is growing problem loans, provided to companies. Currently, the financial situation in the country is becoming increasingly unstable. Banks that lent to builders risk facing mass defaults, which will trigger a new economic downturn.
As the world’s largest exporter, China is under pressure from international competition and sanctions. Trade restrictions from the West harm exports, and domestic demand does not have time to cover these losses. In addition, the slow recovery after the pandemic complicates the situation and reduces the rate of economic growth.
Problems in China’s economy are already worrying world markets. After all, China plays a significant role in global supplies. This is especially noticeable in those who supply raw materials to China or receive investments from it.
For example, China is buying less raw materials due to a decline in production and construction. This hits the economy of countries, for example, Australia or Brazil, which earn a lot from the export of such goods. There are also interruptions in the supply of goods and components in the world, because many industries depend on China. In addition, the World Factory reduces international investment, which slows down the development of large projects, for example, the construction of roads or factories. Uncertainty in the economy of the Celestial Empire scares investors, and this may provoke a new wave of economic instability in the world.
The World Bank has increased the growth forecast of China’s economy for 2025 to 4.5%. China’s economic growth is expected to slow in the new year due to problems in the real estate market, low consumer and business confidence, an aging population and global tensions.
How the economic crisis in China affects the lives of ordinary people
Especially hard young people – every fifth person aged 16-24 cannot find a job. This means that many families have less money for basic needs and the economy slows down even more. Due to the bankruptcy of large construction companies, many people were left without housing for which they had already paid. Construction stops and people lose their savings.
Financial difficulties and delays in obtaining housing cause people frustration and indignation. They doubt more and more whether the authorities are able to cope with the crisis. Such problems can lead to protests and cause tension in society. Although the government is trying to solve the situation, so far the results are not enough.
How is the Chinese “bubble” in the real estate market similar to the American crisis of 2008
For a long time, the Chinese economy depended on housing construction, and now this sector is in crisis. Developers built too many apartments, often without real demand, and banks generously lent to both companies and private investors. This has resulted in many houses remaining empty or unfinished, and developers unable to repay their debts.
Local governments also contributed to this crisis because they depended on the sale of land to developers to finance their budgets. As a result, “ghost towns” appeared in some regions – new houses that no one buys or inhabits.
This crisis is similar to the financial crisis of 2008 in the USA, when citizens also took a lot of home loans, but could not repay them. However, in China, the problem is more with developers and local authorities than with banks, as it was in the US.
The government’s response to the problem
Economists and investors say that they are traditional solutions – investments in new buildings or infrastructure – now perform worse due to the large amount of debt. Some also criticizes authorities for hiding true information that undermines the trust of people and businesses.
In November, Beijing announced about restructuring local government debts amounting to 10 trillion yuan ($1.4 trillion). The initiative involves issuing bonds to replace hidden debt to ease the financial burden of regional governments and support economic growth.
In addition, the government introduced a mechanism “white list”, which financially supports selected real estate projects. The amount of approved loans for such projects will exceed 4 trillion yuan.
The Communist Party of the World Factory also implements housing renovation programs, planning to upgrade 1 million old houses in “urban villages” and other old buildings. Residents will receive monetary compensation for this. The goal of the project is to improve people’s living conditions and encourage them to spend more money.
The measures taken have already been announced. The real estate market has increased activity: more people are viewing, visiting and buying new housing, including on the secondary market.
However, some analysts believe that these measures may not be enough for the long-term stabilization of the economy. They call for more aggressive fiscal stimulus and direct measures to support households to boost domestic demand.
Future development scenarios
Economists predict various options for the development of the economic crisis in China. Problems may worsen, especially in real estate and finance, which will lead to a slowdown in the economy and growing discontent among the population. China can stabilize the economy with government support, but growth will be slower than before.
The crisis can stimulate changes in the economy, in particular, reducing dependence on construction and exports. How will this change China’s economic strategy? China may begin to develop its domestic market more to reduce dependence on exports. The government will strengthen control over financial markets in order to avoid new economic “bubbles”. Will invest in technology and innovation to remain competitive in the global market.
China more than once came out of crises thanks to the reforms. The government can use this experience to rebuild the economy. China has a huge number of consumers, and encouraging people to spend more domestically would help the economy become less dependent on exports. Investments in new technology and innovation can provide China with new opportunities for economic growth.
If China uses these advantages, it can not only overcome the crisis, but also lay the foundation for a stronger economy in the future.
The crisis in the real estate market in China is more than an internal challenge of the superpower
This is a tectonic shift that can change the rules of the global game. Real estate has always been the heart of the Chinese economy, the engine of its rapid growth, fueling employment, infrastructure development and billions in investment. But when that engine began to skid, the world froze in anticipation.
The slowdown in China’s economy caused by the crisis is reverberating far beyond its borders. Investors are nervous, companies are reviewing their strategies, and international markets are looking for new footholds. And it is here that the crisis begins to play in favor of others – those who are ready to pick up the baton.
Vietnam and Indonesia, with their dynamic young workforces and growing economies, are attracting companies looking to diversify their production chains. Due to its proximity to the USA and favorable free trade agreements, Mexico offers investors an attractive alternative. Each of these players now gets a chance to take the place that China has held for years.
But this is not just a redistribution of production chains. This is a change in the global economic balance. A change that is forcing the entire world to reconsider its perception of China’s economic power. What seemed inviolable until recently is now being questioned. Investments are beginning to flow to other regions, creating new economic centers that can challenge China’s dominance.
This crisis exposes the weaknesses of the global economic system, but at the same time opens up new horizons. Countries that are ready to seize this moment can change their future. Perhaps now is the foundation of a new economic order that will redefine the influence and importance of old and new players.
Tetyana Viktorova
