The dragon runs out of gas: why we should worry about China's weakness

It is curious how much the real estate bubbles are alike: in the end, they all seem to converge on the outskirts of cities, on former farmland or wasteland, where rows of bare concrete ghosts stand between closed roads and fences. where middle class dreams are advertised.

"Central Mansion", promises one of the signs in this expansion located about 50 kilometers from the center of Beijing.

Wherever you look you can see unfinished promotions.

Among them, there is a set of towers of the Chinese construction company Evergrande, the most indebted real estate company in the world, a symbol of the collapse of the sector in the country.

The complex is called Royal Peak,

and in the checkpoint located at the entrance there is a sheet with the health QR code that one has to scan everywhere with the mobile to prove that it is free of the virus.

The landscape of ghost homes, so familiar to any Spaniard, and this other symbol of China's strict zero covid strategy, with its high doses of disruption and uncertainty, make up a fairly approximate summary of the risks facing the second economic power of the planet.

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China: pride and control

The International Monetary Fund (IMF) has warned this week that the slowdown in the Asian giant is one of the three ingredients of an incendiary cocktail that is stalking the global economy, along with the Russian invasion of Ukraine and the bite in the standard of living caused “due to persistent and growing inflationary pressures”.

The Washington-based body has reduced the country's GDP growth forecasts to 3.2% in 2022 and 2.7% in 2023 (compared to 8.1% in 2021), according to the

report published on Tuesday.

Very far from the 5.5% that Beijing set as a target for the year.

And when China falters, the rest of the world begins to tremble.

The IMF is not alone.

Forecasts for China have become bleak as the year has progressed.

Given the enormous level of uncertainty, the contraction of domestic consumption and the drop in exports, the country will cease to be Asia's economic locomotive for the first time in three decades, predicts the World Bank, which estimates that the superpower will grow in 2022 less than the rest of the countries in the East Asia and Pacific region for the first time since 1990. Their forecasts put the GDP boom at a meager 2.8%, according to a report from a couple of weeks ago.

The diagnosis touches on the same factors: anticovid measures that, despite keeping the virus at bay, "interrupt supply chains, industrial and service production, national sales and exports";

and the real estate sector,

which he cites as an example of “pre-existing difficulties accentuated by financial constraints” due to the “unsustainable accumulation of debt by developers”.

Although the World Bank underlines that “the direct exposure of systemically important banks to real estate sector loans is limited”.

Exports down

Warning signs have multiplied in recent months.

Chinese goods exports show a gradual slowdown: they have gone from growing 23.9% year-on-year in the third quarter of 2021 to 12.3% in the months of July and August of this year, according to customs data compiled by

an economic medium based in Beijing.

The activity of the services sector contracted in September, according to this same medium, after three months of growth.

And the same thing has happened with the manufacturing activity index, which has already had two months of falls.

With the alarms on, in Beijing this is not the time for big proposals, but for holding your breath: this Sunday the 20th Congress of the Communist Party of China begins, the great five-year political event in which everything points to Xi Jinping once again picking up the baton to exercise a third historic mandate, unprecedented since the times of Mao Zedong.

An outline of the lines to follow in the coming years is also expected from him.

Many await a change of course in the fight against the pandemic that will lead the country towards a gradual reopening;

Other analysts believe that China has entered an era of "decoupling" and "control" in all senses, including the economic one, from which it is difficult to turn back.

The anti-pandemic strategy has become the great topic of conversation: it floats in the air, it is omnipresent, the weariness of a part of the citizenry has been evident for months.

On Thursday, like a brief flash, an unusual protest banner against anticovid measures even appeared on a bridge in Beijing, at a critical moment: at the gates of the congress.

China is one of the few countries on the planet that persists in a strict zero covid strategy, which involves massive testing and total or partial confinement of cities at the time a few cases are detected.

The strategy has also broken the link with the rest of the world, forcing quarantines of up to 10 days to enter the country, in addition to restrictions on obtaining visas, stratospheric ticket prices and regular cancellations of journeys.

A member of the Chinese military at a decorative objects market to commemorate the Chinese New Year in January.

Kevin Frayer (Getty Images)

In spring, while much of the planet took off its masks and decided to live with the virus, the authorities decreed the closure of Shanghai.

The confinement lasted more than two months and marked a before and after in citizen perception.

In economic terms, it has left a deep blow: the GDP advanced only 4% in the second quarter of the year.

Since then, the confinements have continued in different parts of the country.

You never know where or when they might happen, or how long they might last.

In September, more than 30 cities were under "partial or total" isolation measures that affected more than 65 million people.

It does not seem that the policy will change immediately.

The

a medium owned by the Communist Party, has published an article this week defending the persistence in the so-called "zero dynamic covid" strategy, praising its results.

The text assures that only with the prevention of the pandemic “can the economy be stabilized”.

Chinese leaders defend that stopping each outbreak before it spreads - which could put thousands of lives at risk and saturate the health system of a country with 1.4 billion inhabitants - is more profitable than trying to live with the virus, as they have done in United States or the European Union.

Before the great political appointment that starts this Sunday, the omens are multiplied: "The Party Congress will suppose an important remodeling of the direction of China, but, with the predominance of Secretary General Xi, there will be no substantial change in the political direction" , projects a report by Capital Economics, a consultancy based in London.

“There are no signs that the zero Covid [policy] will be relaxed or major stimulus will be introduced, while Xi will continue to push for the Party to oversee all key areas of the economy.”

"We do not see an exit strategy," Jörg Wuttke, president of the European Union Chamber of Commerce in China, lamented in mid-September during the presentation in Beijing of a very harsh report prepared by this body, which represents 1,800 European companies established in the country.

Wuttke warned a small group of media about "the risks of decoupling" from China and wondered if Beijing was willing to "sacrifice on the altar of ideology" the economic benefits of "opening and reform".

The report made it clear that this seemed to be the line to be followed by the party.

"China's estrangement from the rest of the world—embodied in the restrictions imposed by its covid-19 policy—indicates that, for the time being, ideology trumps economics," he asserted.

“While China once shaped globalization,

now the country is seen as less predictable, less reliable and less efficient.”

That uncertainty, according to the report, is already causing a "loss of business confidence" and opening the door for "other emerging markets" in the region to fill that "void."

Zhang Jun, director of the China Center for Economic Studies at Fudan University in Shanghai, believes that the Chinese government does not plan to abandon the "general framework" of the zero covid strategy in the next "couple of years", but it does it will adjust it "a little" and "optimize" it to adapt it to "local conditions", taking into account that the new variants of the virus "are a little safer".

Zhang also does not expect big initiatives to restore the lost luster to the real estate sector.

"I think China's core leadership hopes to see the economy can find new sources of growth," encouraging other fields such as "high-tech," while restricting traditional ones.

“The resumption of the real estate [sector] as an engine of the economy is not consistent with the internal mission of the central [Party] leadership,”

ditch on the other side of the telephone wire.

But he makes it clear that Beijing will not get into economic trouble until the five-year political transition is complete, with the appointment of a new government in March.

Shadow of Evergreat

Beijing has been advancing in recent months a battery of measures to prevent the collapse of the real estate market, whose fall has been coupled with the Chinese company Evergrande, the most indebted real estate company in the world, which for the first time failed to comply with the payment of a of its debts in dollars in December 2021. The measures, for the moment, have no effect: the prices of the new housing sector fell for the twelfth consecutive month in August, residential sales plummeted 30% in the first eight months of the year, and investments fell by 7%, according to data from the National Statistics Office collected by Bloomberg.

With projects stalled across China, in July the Politburo, the Party's highest power body, urged to "stabilize the real estate market" and pointed out that local governments would be responsible for guaranteeing the delivery of houses under construction already paid for.

The move followed a mortgage boycott movement by buyers of hundreds of unfinished developments, a dangerous wave of discontent potentially igniting in the critical months before Congress.

In September, the People's Bank of China announced it would allow some local governments to relax mortgage loan requirements for first-time home buyers in a new effort to stoke the market.

Works on the Royal Peak housing development of the Evergrande real estate company in Beijing, on Friday. Guillermo Abril

Taking stock, Zhang compares Xi's decade in power to "the progressive era in America" ​​about a century ago, when movements and groupings were born to deal with the problems of rapid industrialization and urbanization that followed the Civil War. American: from the spread of slums to the exploitation of labor or financial concentration.

"Xi has tried to deal with these problems at the cost of slowing down growth."

In Zhang's opinion, the China that emerges from the pandemic, after 2022 of low growth, will no longer be the hypergrowth of other times, but will be around 5%.

In recent years, after the Great Recession, China has been withdrawing and turning in on itself, with "a change in the development trajectory of the country in search of self-sufficiency", argues Citi, one of the largest financial institutions in the world. , in its October Global Perspectives report.

Since 2020, with the 14th Five-Year Plan, Beijing has announced the so-called "double circulation", which involves moving from an export-driven economy to one focused on the domestic market through self-sufficiency (or "internal circulation").

The turbulent geopolitical context – the trade war between the United States and China, the tightening of controls on the export of US technology, the sanctions against Russia after the invasion of Ukraine – have accelerated this change of course.

“'Sputnik Moment”

Citi asserts that we could be facing a “

—in reference to the first satellite put into orbit by the USSR— in terms of Chinese innovation.

"Strong public spending on research and development, a large domestic market and highly qualified talent place China in an increasingly competitive position with industrialized economies," the bank's experts point out.

Meanwhile, the cheap manufacturing model will be moving to other places.

"Despite turning inward to meet the challenges of today's new world, China's global relevance will continue to grow," they predict.

Scott Kennedy, senior adviser to the Chinese Business and Economics Chair at the Center for Strategic and International Studies, has just passed through the strict quarantine to enter China.

This expert had not done fieldwork in the country since before the pandemic.

After flight cancellations and other misadventures, he has finally landed in the capital and assures that he has found a country in which the "control dial has moved up" in various areas, according to what he says in a meeting with foreign correspondents.

"If you look at the level of intervention in the economy, I think it has increased," he says.

In his opinion, during the first couple of years in power, Xi was waiting to see if the market mechanisms themselves would solve some challenges, such as housing.

But after the turbulence of 2015 and 2016, with the devaluation of the yuan and the turmoil of the Chinese stock market, the Government became "nervous".

"Since then, I think we've seen more and more intervention in the economy."

Kennedy believes that in the last decade the Asian giant has taken steps forward and backward.

"It's a mixed record," he summarizes.

And he gives the example of electric vehicles, a sector heavily subsidized by the government, in which he has made progress.

In the goal of "moving up the value-added chains, reinforcing his research in basic sciences and [his] applications," he believes that Beijing continues to move forward.

But he emphasizes that in today's interconnected world, no country can successfully innovate on its own.

"It doesn't matter if you're at the front, in the middle, or at the back of the pack, you depend on everyone else."

China and the United States, in an increasingly isolationist world, would face "monumental problems in their ability to continue to innovate and increase productivity."

In the relationship between the two powers, which is going through its lowest moment in decades, the latest move by Washington flies over, which last week announced a new blow against the Chinese technology sector.

The measures mean that no company will be able to supply Chinese companies with certain semiconductors made anywhere in the world with US technology.

With the regulation, the United States intends to curb Beijing's access to cutting-edge technology that it can use for its technological or military development.

Kennedy concludes with a diagnosis: China remains a "fat tech dragon."

"They innovate, but they waste an incredible amount of resources in the process."

And he doesn't think they'll reach "absolute self-sufficiency" either.

In his words: "It's like waiting for Godot."

Something that, in the end, never happens.

A slow motion race

Some even question the idea of ​​China becoming the world's leading economic power.

The economist Michael Pettis believes that it is impossible for the country to take the lead over the United States, as has been predicted ad nauseam.

In his opinion, the Asian giant has fallen into the same trap in which other large developing economies stumbled at the time (such as Japan in the 1990s or Brazil in the 1960s): once they reach their peak, they moderate growth and do not they are capable of completing a transition to another model focused on consumption. 

Pettis is a respected expert on the Chinese economy.

He has lived in the country for nearly two decades and teaches finance at Peking University's Guanghua School of Management.

During the interview held in the courtyard of his traditional Pekingese-style house, he assures that China's great problem —which he already had before the pandemic— is precisely its low internal consumption. 

In the conversation he touches on another of the problems of the hyperdevelopment of economies: it tends to favor the creation of some elites, but it does not drive the whole society equally, so there comes a time when the elites try to prevent change.

Faced with the social challenges (and possible explosions) that may arise, there are two possible solutions: either the extreme flexibility allowed by democratic systems (as happened in the US in the 1930s), or greater authoritarianism.

“This is perhaps what we are seeing in recent years,” says Pettis.

Greater control to guarantee "stability", a fetish word in Xi's decade in power.

This economist warns of another of the great problems for China: the drop in exports, a key item in his model, which has played a rebalancing role in recent decades for multiple internal problems.

As argued in a recent article published by the Carnegie think tank, an eventual fall in the Chinese trade surplus could "possibly" cause an increase in unemployment or in the level of private debt, unless Beijing opts for active policies to stimulate the demand, such as public investments or the financing of private consumption.

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