The CCP Is Causing China’s Economic Problems

CommentaryChina’s economy is floundering.Slowing growth. Unemployment. Lack of consumer confidence. Deflation. Tariffs. Export controls. Ghost cities. Demographic headwinds. Export and manufacturing contractions. Crackdowns on the tech sector. Chinese Communist Party (CCP) cells within corporate governance structures. Capital and labor flight. Regime borrowing and spending that crowd out private investment.“Provinces have cut civil servant pay, including for school teachers, thereby denting morale,” according to Bloomberg in late October. “The poorest regions are lobbying for a central government bailout, with veiled threats of bond defaults.”Everyone who borrowed based on the assumption of rising property values is at risk. A Chinese financial conglomerate, Zhongzhi Enterprise Group, is the first to default. It released a letter on Nov. 22 that rocked business confidence. Zhongzhi is at least $31 billion in the hole. Its liabilities, which are at least $59 billion, exceed its assets of just $28 billion, many of which are illiquid real estate investments gone bad.Related Stories11/30/202311/28/2023Zhongzhi is missing debt payments, which will put other financial institutions in trouble. The defaults could cascade, as did the Lehman Brothers bankruptcy in 2008.On Nov. 23, The Wall Street Journal mentioned fears of a “Lehman moment” in China. “Missed payments by the trust business, Zhongrong International Trust, have piled up,” the Journal wrote. “Since August, at least 16 publicly listed companies in mainland China have said in stock-exchange filings that they didn’t receive interest or principal payments on products managed by Zhongrong Trust.”At the end of 2022, Zhongrong had $108 billion in assets under management. Its investors surely want their money back just about now.Real estate and its related industries are approximately 30 percent of China’s GDP. Yet it has been clear for years that China does not really need all those new buildings. Entire new megacities are “ghost” developments without people. The Chinese Communist Party (CCP) is now trying to divert new loans to China’s industrial sector, but that is also at risk given international efforts to “derisk” and “decouple” from China.To simplify for purposes of explanation, in the 2010s, investors got excited by the runaway 10 percent GDP growth rates in China. They must have thought the debt-fueled growth would go on forever. But 10 percent growth never does, and debt must be repaid.Beijing got excited, too, and thought communist dictatorship, particularly its own kind of communist dictatorship, was the answer to all of the world’s economic problems. The CCP’s Xi Jinping doubled down on building a military and outgoing economic strategy (the Belt and Road Initiative) to force, buy, and “enlighten” the world, starting with Hong Kong and Taiwan.The glory days would not last. “The Four Trillion RMB stimulus rolled out in 2008, followed by an infrastructure investment and housing boom, sustained China’s economic growth rate at around 10 per annum until 2011,” according to an article by professor Hanming Fang at the University of Pennsylvania. “But these debt-financed investments also planted the seeds for the debt problems Chinese developers and local governments are currently facing.”When the CCP identified problems in China’s economy, like overborrowing by real estate developers, it turned to page 3 of its communist playbook and started ordering people around as a fix. The CCP told its big banks to follow the “three red lines” and not lend more money to over-leveraged real estate developers. That made these developers stop building homes they had already sold, decreased China’s GDP growth, and increased political instability, including protests by homebuyers without homes.The CCP’s "three red lines" caused a payment crisis for some large financial institutions, including Zhongrong, the first big one on its way to a fall. When the banks stopped lending to distressed developers, developers stopped building, their revenue ceased, and they could not pay back their old loans. International and consumer confidence in the entire real estate sector, and by extension, China’s economy, swooned, and not in a good way.“Even before the country’s COVID shutdowns, growth had begun stalling amid demographic headwinds, an emerging slowdown in the real estate sector, and a re-emergence of state-led economic policymaking,” according to Mr. Fang. “The centralization of power has fed into a worsening relationship with China’s western partners that further threatens the country’s growth prospects.”Now, the economic “geniuses” in CCP headquarters have reversed themselves. The CCP is pressuring Chinese financial institutions to start lending to distressed real estate developers. They are even shopping around a “white list” of 50 such developers deserving of loans, which will be provided by the banks under regime pressure to throw good money after bad. Investors and depositor

The CCP Is Causing China’s Economic Problems

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Commentary

China’s economy is floundering.

Slowing growth. Unemployment. Lack of consumer confidence. Deflation. Tariffs. Export controls. Ghost cities. Demographic headwinds. Export and manufacturing contractions. Crackdowns on the tech sector. Chinese Communist Party (CCP) cells within corporate governance structures. Capital and labor flight. Regime borrowing and spending that crowd out private investment.

“Provinces have cut civil servant pay, including for school teachers, thereby denting morale,” according to Bloomberg in late October. “The poorest regions are lobbying for a central government bailout, with veiled threats of bond defaults.”

Everyone who borrowed based on the assumption of rising property values is at risk. A Chinese financial conglomerate, Zhongzhi Enterprise Group, is the first to default. It released a letter on Nov. 22 that rocked business confidence. Zhongzhi is at least $31 billion in the hole. Its liabilities, which are at least $59 billion, exceed its assets of just $28 billion, many of which are illiquid real estate investments gone bad.

Zhongzhi is missing debt payments, which will put other financial institutions in trouble. The defaults could cascade, as did the Lehman Brothers bankruptcy in 2008.

On Nov. 23, The Wall Street Journal mentioned fears of a “Lehman moment” in China. “Missed payments by the trust business, Zhongrong International Trust, have piled up,” the Journal wrote. “Since August, at least 16 publicly listed companies in mainland China have said in stock-exchange filings that they didn’t receive interest or principal payments on products managed by Zhongrong Trust.”

At the end of 2022, Zhongrong had $108 billion in assets under management. Its investors surely want their money back just about now.

Real estate and its related industries are approximately 30 percent of China’s GDP. Yet it has been clear for years that China does not really need all those new buildings. Entire new megacities are “ghost” developments without people. The Chinese Communist Party (CCP) is now trying to divert new loans to China’s industrial sector, but that is also at risk given international efforts to “derisk” and “decouple” from China.

To simplify for purposes of explanation, in the 2010s, investors got excited by the runaway 10 percent GDP growth rates in China. They must have thought the debt-fueled growth would go on forever. But 10 percent growth never does, and debt must be repaid.

Beijing got excited, too, and thought communist dictatorship, particularly its own kind of communist dictatorship, was the answer to all of the world’s economic problems. The CCP’s Xi Jinping doubled down on building a military and outgoing economic strategy (the Belt and Road Initiative) to force, buy, and “enlighten” the world, starting with Hong Kong and Taiwan.

The glory days would not last. “The Four Trillion RMB stimulus rolled out in 2008, followed by an infrastructure investment and housing boom, sustained China’s economic growth rate at around 10 per annum until 2011,” according to an article by professor Hanming Fang at the University of Pennsylvania. “But these debt-financed investments also planted the seeds for the debt problems Chinese developers and local governments are currently facing.”
When the CCP identified problems in China’s economy, like overborrowing by real estate developers, it turned to page 3 of its communist playbook and started ordering people around as a fix. The CCP told its big banks to follow the “three red lines” and not lend more money to over-leveraged real estate developers. That made these developers stop building homes they had already sold, decreased China’s GDP growth, and increased political instability, including protests by homebuyers without homes.

The CCP’s "three red lines" caused a payment crisis for some large financial institutions, including Zhongrong, the first big one on its way to a fall. When the banks stopped lending to distressed developers, developers stopped building, their revenue ceased, and they could not pay back their old loans. International and consumer confidence in the entire real estate sector, and by extension, China’s economy, swooned, and not in a good way.

“Even before the country’s COVID shutdowns, growth had begun stalling amid demographic headwinds, an emerging slowdown in the real estate sector, and a re-emergence of state-led economic policymaking,” according to Mr. Fang. “The centralization of power has fed into a worsening relationship with China’s western partners that further threatens the country’s growth prospects.”

Now, the economic “geniuses” in CCP headquarters have reversed themselves. The CCP is pressuring Chinese financial institutions to start lending to distressed real estate developers. They are even shopping around a “white list” of 50 such developers deserving of loans, which will be provided by the banks under regime pressure to throw good money after bad. Investors and depositors in the banks could thus be left holding more bad loans. The CCP “fix” is actually just switching the costs and risks of bad real estate investment and worse CCP policies from the real estate companies to the banks.
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 An aerial photo shows deserted villas in a suburb of Shenyang in China's northeastern Liaoning Province on March 31, 2023. China's real estate industry is in a record-breaking slump. (Jade Gao/AFP via Getty Images)
An aerial photo shows deserted villas in a suburb of Shenyang in China's northeastern Liaoning Province on March 31, 2023. China's real estate industry is in a record-breaking slump. (Jade Gao/AFP via Getty Images)

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The fault for China’s economic chaos lies squarely with the CCP. After telling the banks to stop funding real estate developers and creating many other problems that have decreased consumer and business confidence in China, the CCP is trying and failing to put the genie back in the bottle. It is too late, and the economy is seizing up. China’s momentum is gone. Its population is shrinking relative to the world, and so is its economy. Thousands of Chinese are voting with their feet and leaving the country, or voting in the bedroom by not having children.

“The Chinese government’s recent tendency to rapidly engineer policy U-turns hurts confidence,” according to Mr. Fang. “This possibility makes it more difficult for Chinese businesses to attract foreign investment and has become a key barrier to the international-market expansion of Chinese firms like TikTok and Huawei.”

China’s problem is the CCP, which not only destroyed the momentum of its economy and property developers but also destroyed international businesses trying to invest in the country, the entire financial industry of Hong Kong, and the Uyghurs, Tibetans, and Falun Gong who might have helped China if they were allowed.

Instead, the CCP attempted to assimilate them with genocidal policies that have rightly drawn the opprobrium of the international community and struck fear into international businesses that do not want to risk hits to their reputations. They are turning away from China and looking elsewhere, like India, Mexico, and Vietnam.

Xi is tone-deaf, though, and continues on his bizarre and self-destructive path for China. On Nov. 15, he reportedly issued another veiled threat of war against Taiwan to President Joe Biden’s face in San Francisco during the APEC summit.

Taiwan is a huge investor in China. There is no clearer example of the CCP being not only economically but also politically disastrous for China, all born of a hubris that its communist system is somehow superior to market democratic systems in places like the United States, Europe, Japan, South Korea, and Taiwan, all of which have far higher GDP per capita.

Investors who thought China was doing great in the 2010s when easy money flowed are now thinking twice and trying to get out. The outflow of money and people is generally depressing China’s real estate market and economy, making things even worse for China’s future.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.