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Could China's Real Estate Crisis Spread Like Japan's Lost Decade?
  • By Kim Min-seong, reporter
  • 승인 2023.09.04 00:10
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▲Front gate of the People's Bank of China (Source: Reuters)

China's economy is showing concerning signs. According to China's customs statistics, the country's exports in July 2023 decreased by 14.5% compared to a year ago. This marks the largest decline since the initial outbreak of COVID- 19 in February 2020. Consumer inflation in China recorded its first year- on- year decrease since February 2021, as consumption slowed due to the pandemic. The real estate sector in China, which has been a driving force for the economy, continues to face challenges due to defaults by real estate companies such as 'Country Garden' and 'Sino- Ocean Group.' The youth unemployment rate is also rising, adding to the alarms sounding across various sectors of China's economy.

For the past 40 years, China's economic growth has been led by its real estate sector. China invested heavily in social infrastructure, particularly in transportation (roads, railways, aviation), ports, and energy, significantly increasing job creation and prosperity in related industries, like electronics and furniture manufacturing. As the Chinese acquired homes, their assets grew alongside the rapid economic expansion. This real estate and related industries sector came to constitute about a third of China's Gross Domestic Product (GDP), a phenomenon sometimes referred to as 'cement GDP,' as coined by Professor An Yuhua from Sungkyunkwan University's Graduate School of China Studies.

China's once rapid economic progress started to slow down in the face of the COVID- 19 pandemic. China, which pursued a robust "zero- COVID" policy during the pandemic, reported a much lower- than- expected economic growth rate of 0.4% in the second quarter of 2022. Many market participants initially predicted a strong rebound in China's economy after reopening. However, the housing market in China faced liquidity constraints due to tightened real estate investment regulations starting last year. As a result, many companies, including China's top real estate developer 'Evergrande,' declared defaults. This led to halted apartment construction and had negative effects on the broader economy, particularly impacting lower- income groups. Additionally, oversupply in the market led to soaring vacancy rates, contributing to an overall economic slowdown.

Some analysts attribute the recent economic slowdown in China to the limitations of its economic system, often referred to as "socialism with Chinese characteristics." Professor Hyun Sang- baek and four others pointed out in a KIEP (Korean Institute for International Economic Policy) policy briefing that, "While China provided a timetable for opening up after joining the WTO (World Trade Organization), the opening of the financial sector has been progressing slowly compared to other areas such as manufacturing." Unlike Western advanced economies that rely more on equity markets for funding, Chinese companies heavily depend on bank loans. According to 'One Road Research,' a private think tank, only about 5% of Chinese companies' funding comes from the stock market. As a result, a substantial portion of Chinese banks' loan portfolios are tied to real estate, creating a situation where risks in the real estate market ripple across other economic sectors.

To address these liquidity concerns, the People's Bank of China lowered the one- year loan interest rate from 3.55% to 3.45%. Additionally, the National Development and Reform Commission of China announced "20 measures for consumption recovery and expansion" last month. However, the market has responded skeptically to China's measures so far, as they are seen as not providing direct fiscal stimulus.

The South Korean government and businesses, which heavily rely on China for exports, are also acutely sensitive to the risks posed by China's economic situation. Prime Minister Han Duck- soo stated during a government inquiry in June 2022, "China's economy is heading towards a near collapse," emphasizing the need to prepare countermeasures. The Ministry of Economy and Finance has established a "China Economic Situation Team" to proactively monitor and respond to the growing uncertainties.

While experts believe that the current downturn is unlikely to escalate into an international financial crisis akin to the 2008 Lehman Brothers event, the effects of China's economic slowdown, given the ongoing reshoring and efforts to diversify supply chains, are of global concern. With China's role as the world's factory diminishing, the impact of its economic downturn on the global economy is a topic of great interest. Furthermore, the focus is now on the potential future shifts in China's previously guarded financial market following this economic slowdown.

By Kim Min-seong, reporter  kms9494274@gmail.com

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