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As China’s property crisis grows, is the global economy at risk? – Al Jazeera English

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China’s property market is in the midst of a slow-moving crisis.

Real estate prices have plummeted as authorities seek to rein in unsustainable debt and market speculation. Hundreds of thousands of homebuyers are refusing to pay their mortgages for pre-sold properties as developers struggle to complete housing projects on time.

With property accounting for 15-30 percent of China’s gross domestic product (GDP), the market’s woes spell trouble for the world’s second-largest economy – and potentially global growth as well.

Why is China’s property market in crisis?

China’s property troubles are, in part, the result of deliberate policy decisions. In August 2020, Beijing rolled out a “three red lines” policy aimed at carefully deflating a huge housing bubble that had been decades in the making.

The policy had twin goals: lessening the economy’s over-reliance on property and tamping down on speculation that had put house prices out of reach for many middle-class Chinese.

Under the policy, developers were required to meet strict markers of financial health, including a 100-percent cap on net debt to equity, to borrow from banks and other financial institutions.

Many developers, it turned out, had been operating far outside the “three red lines” and were saddled with enormous debts. Suddenly unable to borrow under the new rules, the sector was met with a severe cash crunch.

In December, Evergrande, one of China’s biggest developers, defaulted on interest payments due to its offshore bondholders, followed shortly after by Kaisa Group Holdings.

Property prices declined for an 11th-straight month in July and are down as much as 30 percent compared with last year.

“What China is experiencing right now is a policy-induced crisis,” Gabriel Wildau, the managing director of risk analysis company Teneo, told Al Jazeera.

“What I mean by that is, people have been warning about a housing bubble for many years, and for good reason, but the acute stress that the market is under right now is the direct result of very draconian restrictions on lending to developers that were imposed about a year and a half ago.”

Xi JIngping looks on before a meeting in Beijing
Chinese President Xi Jinping has sought to rein in China’s property sector, saying ‘houses are for living in, not for speculation’ [File: Lintao Zhang/Reuters]

The sector’s troubles have spiralled since then as cash-strapped developers have struggled to complete projects on schedule.

After beginning in the southeastern city of Jingdezhen earlier this year, protests by buyers of pre-sale properties have spread to almost 100 cities and grown to involve some 300 homeowners’ groups.

Deutsche Bank has estimated that the value of the mortgages affected by the boycotts amounts to 1.8 to two trillion Chinese yuan ($270bn-300bn), or about 5 percent of all mortgage lending.

“The crux of the problem is that property developers have insufficient cash flows – whether because of debt-servicing costs, low housing sales, or misuse of funds – to continue with projects,” Tommy Wu, the lead economist at Oxford Economics, said in a note earlier this month.

“Resolving this problem will rebuild homebuyers’ confidence in developers, which will help support housing sales and, in turn, improve developers’ financial health.”

Could this drive a global economic crash?

China’s property woes pose a substantial risk to its economy, which is already under strain due to Beijing’s harsh “zero-COVID” policies and slowing global growth. By some estimates, real estate accounts for 30 percent of GDP – about twice the equivalent share in the United States.

While some analysts believe the market has reached the bottom, the sector’s woes are expected to persist for some time. In July, S&P Global Ratings estimated that property prices would decline 30 percent this year – a worse decline than during the 2008 financial crisis.

“That’s just a huge chunk of the economy that’s kind of underwater now,” Teneo’s Wildau said. “Even continuing on the pace we are on is, I think, unsustainable. It would mean growth was substantially below target for this year if it continues like this.”

Since Chinese property developers hold relatively small amounts of overseas debt, the global economy is not considered to be at a high risk of the kind of financial crisis sparked by the collapse of Lehman Brothers in the United States, said Alicia García-Herrero, the chief Asia Pacific economist at Natixis in Hong Kong.

But the size of China’s economy, which accounts for almost one-fifth of global GDP, means a major slowdown could still have a serious effect on global growth.

“The global impact is mostly due to very low growth from China, it’s not so much a financial impact,” García-Herrero told Al Jazeera.

“Of course, if Chinese banks finally can’t swallow this shock and their non-performing loans increase massively and there’s a financial crisis in China – which I don’t think will happen immediately – it will be more like Japan in the 80s and 90s. So saddled with bad loans, no credit, the economy doing very poorly, deflation – this is, I think, the scenario. So not an immediate Lehman type event.”

The World Economic Forum has estimated that every 1 percentage-point decline in China’s GDP results in a 0.3 percent reduction in global GDP.

In a 2019 study by the United States Federal Reserve, economists estimated that an 8.5 percent fall in China’s GDP would result in a 3.25 percent drop in advanced economies and nearly 6 percent decline in emerging economies.

china property
Hundreds of thousands of Chinese homebuyers are threatening to refuse to pay their mortgages on pre-sold, unfinished properties [File: Qilai Shen/Bloomberg]

China’s economy is unlikely to experience an economic meltdown of that severity. But it could be on track for a protracted slump that drags on global growth in the coming years, according to analysts.

Teneo’s Wildau said that Chinese policymakers have tools not readily available in more capitalistic countries to avert a full-blown financial crisis.

“Chinese leaders have a much greater degree of control over the financial system and the real economy than US policymakers did in 2008. So they have the tools to stave off an acute crisis,” he said.

“They have the tools to stave off financial contagion and a complete collapse in credit flows because they can simply order the banks to lend. They can work outside the legal bankruptcy system to keep everyone liquid, to avoid disorderly chains of default.”

But Wildau said China could still be looking at years of economic stagnation, which would feel like a recession to many Chinese after decades of strong growth.

“We could just see an extended period of slow growth, something more like a Japan scenario, a sort of grinding slowdown over many years even absent acute financial distress or panic in the market,” he said.

What is China doing about the crisis?

Beijing has signalled that supporting the property market is an important task despite its determination to reduce the economy’s reliance on the sector.

At a meeting of China’s top decision-making body in July, officials said there was a need to “stabilise” the real estate market while emphasising that local governments should take responsibility to ensure pre-sold homes are finished.

Earlier this month, Chinese media outlet Caixin reported that Beijing was preparing to issue 200 billion yuan ($29.3bn) in loans to complete unfinished housing projects.

Beijing has also taken measures to boost the economy more generally, such as lowering interest rates and rolling out stimulus, including the announcement last week of 300 billion yuan ($44bn) in new credit through its state-run policy banks.

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“We expect additional funding will be arranged to support the completion of unfinished houses,” Wu, the Oxford Economics economist, said in a note.

“Indeed, the statement from July’s Politburo meeting stresses the need to stabilise the property market and to ensure the delivery of houses. We think these efforts are unlikely to come directly from the central government. Instead, authorities will likely ask local governments, banks, and property developers to coordinate and ensure that unfinished housing projects are completed.”

China’s efforts to prop up the market may ultimately be limited, with Beijing widely expected to stick to its “three red lines” and Chinese President Xi Jinping’s mantra that “houses are for living in, not for speculation”.

Wildau said China’s policymakers now faced the dilemma of whether to press ahead with their crackdown on real estate or reverse course for the sake of growth.

“If they were to embark on a bailout now, it would be rowing back and retreating on those gains,” he said.

“It would also be politically embarrassing because it would look like a reversal or an admission of error. So that’s why I think we’ve seen policy be relatively lacklustre. We haven’t seen a housing bailout that a lot of investors have been hoping for.”

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Demand for Aluminum Slows in Another Sign of Troubled Economy – Bloomberg

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Demand for Aluminum Slows in Another Sign of Troubled Economy  Bloomberg



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4 experts explain how to prepare for a new economic reality and protect the most vulnerable – World Economic Forum

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  • Chief Economists are mostly in agreement that the outlook for the economy is bleak and that recession is likely.
  • This new reality will take its toll on inequality and widening societal gaps.
  • Four experts explain how policies might address the immediate crisis with an eye to beefing up resilience in the long term.

The latest World Economic Forum Chief Economists Outlook suggests a global recession is “somewhat likely” and the fallout will take its toll on inequality. Just this week, the OECD put out a similar message in its interim report, warning that recent indicators have “taken a turn for the worse”.

Chief Economists have been nearly unanimous in predicting wages to fail to keep pace with surging prices, with nine in ten expecting real wages to decline in low-income economies in 2022 and 2023, alongside 80% in high-income economies.

This will see a continuing deterioration of household purchasing power compounded by aggregate pressures on basic necessities such as food and energy.

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Chief Economists Outlook September 2022

Image: World Economic Forum

Saadia Zahidi, Managing Director at the World Economic Forum highlights “Growing inequality between and within countries” as the “ongoing legacy of COVID-19, war and uncoordinated policy action.” She says, “With inflation soaring and real wages falling, the global cost-of-living crisis is hitting the most vulnerable hardest. As policy-makers aim to control inflation while minimizing the impact on growth, they will need to ensure specific support to those who need it most.”

We asked four chief economists who took part in the survey which policies they think will protect the most vulnerable and how this new economic reality might be steered to better prepare for the future.

‘Pricing carbon (globally) must play a central role’

Christian Keller, Head, Economics Research, Barclays

The one change I would make to the global economy to better prepare us for the future would be to implement a global carbon pricing mechanism. The earth’s climate is the ultimate ‘tragedy of the global commons’: individual and collective incentives are misaligned, because the price of harmful economic activities does not accurately reflect the true social cost. It results in the over-production of carbon-intensive assets to the ultimate detriment of global welfare.

Pricing carbon emissions – or the internalization of their negative externality – is the first step to solve this ‘market failure’. Increasing their price, dis-incentivizes carbon emissions, while also generating public revenues to compensate groups negatively affected by the transition and/or fund public goods such as low-carbon energy infrastructure.

Such a carbon pricing mechanism would ideally be global in nature, to avoid regulatory arbitrage and cross-border carbon leakage.The principles of such a mechanism are textbook economics, but many more questions arise in practice, including how to determine the true ‘marginal external costs’. Naturally, it would be a discovery process and there would be glitches. However, if one does believe climate change is a threat and that it is caused by carbon emissions, pricing carbon (globally) must play a central role.

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Chief Economists Outlook September 2022

Image: World Economic Forum

‘Build a resilient and sustainable pricing strategy’

Gregory Daco, Chief Economist, EY-Parthenon, USA

The various drivers of economic activity that were previously taken as a given will now warrant much more attention from businesses, investors and consumers. There will be five central tenets to this new paradigm: inflation, labour, supply chain, the cost of capital, and environmental, social and governance (ESG) and sustainability issues.

While the current focus is that inflation is hovering at multi-decade highs in many places around the world, there doesn’t appear to be a broad realization that inflation persistence and volatility are likely to be a key feature of the outlook over the next few years. As such, businesses will need to consider building a resilient and sustainable pricing strategy that is nimble enough to navigate a world where demand will ebb and flow more significantly than in the past few decades. Cost management and productivity gains will likely also have to be central to companies’ holistic inflation strategy.

In an environment, where talent is not just more expensive but is also perceived as more valuable and where pricing power will be limited by softening final demand, business executives will increasingly have to focus on productivity and efficiency gains to offset higher labor costs. This won’t be easy, but it will be central to their success.

Supply chain issues have been a central part of the inflation story of the last few years, and it would be misguided to believe that these issues will dissipate overnight. Businesses will need to build supply chain resilience while being aware of economic, geopolitical and political undercurrents.

The rise in the cost of debt has led business executives to put some investment plans on hold, while the large fluctuations in equity valuations have created a wedge between buyers’ and sellers’ perception of the true value of an asset. In addition, the significant US dollar appreciation against most other currencies has created a new set of considerations for multinationals having to hedge their international exposure and incorporate a new consideration into their organizational and portfolio decisions.

Over the last few years, businesses have increasingly focused on ESG and sustainability issues to create long-term value, develop a sense of purpose, and provide trust and confidence to the market. The last few months have brought about a sense of urgency to these developments.

‘Address structural factors to reduce future vulnerabilities ’

Eric Parrado, Chief Economist; General Manager, Research Department, Inter-American Development Bank

The global inflationary crisis is having profound consequences on the well-being of populations around the world, especially in emerging and developing economies. Estimates for Latin America and the Caribbean suggest that food inflation could increase poverty rates by 1.6 percentage points and extreme poverty by 1.8 percentage points.

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Chief Economists Outlook September 2022

Image: World Economic Forum

Policies should have a short term and long-term focus. In the short-term governments should provide transfers for the poorest populations to compensate increases in food prices. This helps to keep people from sliding into poverty and extreme poverty. Subsidies should be designed and funded carefully to avoid larger fiscal imbalances that could contribute to higher inflation rates.

Long-term policies address structural factors to reduce future vulnerabilities. Investing in agricultural innovation, research and climate change adaptation are key to improving productivity in agro-industries, food system resilience and strengthening food security in the long run.

A greater focus should be placed in climate change mitigating policies to ensure agricultural frontiers are not displaced further, and food supply is not restricted. At the same time, countries can avoid directing scarce fiscal resources to cover the costs of dealing with costly man produced natural disasters.

‘Drive employment opportunity and protection’

Svenja Gudell, Chief Economist, Indeed

Access to good jobs is an integral part of both obtaining and sustaining quality of life and well-being. From a labour market perspective, policies which could dramatically benefit vulnerable populations include: skills-based hiring, pay and wage transparency, second chance hiring, accessibility tools and accommodations, and inclusive and unbiased hiring – to name a few. While some leaders look to a one-size-fits-all policy to address cost of living issues, the truth is this rarely results in the desired outcome. Instead, policymakers must consider both the broader, long-term picture, as well as the unique situation within industries, locations, and individual needs to help close these gaps.

As we face hardships ranging from increased cost of living, global warming, geopolitical tensions, etc., employment opportunity and protection for all is key to future prosperity. The micro and macro benefits of adequate, gainful employment enable an increased quality of life and well-being, opportunity for economic mobility, and benefits to both physical and mental health. Ultimately, on a global scale, we must identify and build on technology that is being used effectively to support workers and ensure that job mobility, continuous learning and access to information are widely available to drive employment opportunities and protection for workers.

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What next for the global economy? 3 experts have their say – World Economic Forum

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World Economic Forum articles may be republished in accordance with the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International Public License, and in accordance with our Terms of Use.

The views expressed in this article are those of the author alone and not the World Economic Forum.

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