Chinese economy reveals its flaws

Audio 04:09

The Chinese real estate giant Evergrande is strangled by a colossal debt of 260 billion euros.

Here in Shenzen, near the Evergrande headquarters, in the Chinese province of Guangdong, in September 2021. © REUTERS - ALY SONG

By: Agnieszka Kumor

3 min

After extraordinary growth of over 18% in the first quarter, the Chinese economy is stalling.

In the third quarter, growth hardly climbed to 4.9% of GDP.

Unheard of since the 90s.

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The current slowdown in the Chinese economy was expected.

But not the problems that affect her.

Flaws have appeared in the Chinese model, which until then had been the driving force behind the world economy.

Uncertainty factors

China faces many factors of instability and uncertainty.

The

power cuts

that force companies to interrupt their activity are a.

The difficulties of the real estate giant, Evergrande

, strangled by a colossal debt of 260 billion euros are another.

The collapse of this giant is influencing the entire sector.

As a result, buyers have become suspicious and house prices are falling.

However, real estate represents a quarter of Chinese GDP if we include upstream and downstream industries.

In the past, Beijing has often used the real estate sector to boost the economy by opening the floodgates of credit.

The end of easy money

But this method could be abandoned. The Chinese Housing Minister said in January 2021 that the government would no longer use real estate to support the economy. However, the outright bankruptcy of Evergrande could have serious consequences for the Chinese economy. Even if we are moving more towards a controlled dismantling. The collapse of this giant is undoubtedly the sign of the end of easy money in China. Evergrande, but also Kaisa, are the fruit of the Chinese economic miracle and the hyper-growth that China has experienced for almost forty years. But this miracle is nothing more than the consequence of the biggest real estate boom in history caused by the biggest rural exodus ever.

However, the Chinese government has sought to anticipate this over-indebtedness of the promoters.

He did so by putting red lines with, in particular, ratios that reduce the recourse to borrowing by these groups.

Moreover, these measures may not be enough.

What the US Federal Reserve particularly fears is contagion to the Chinese financial system and, by domino effect, to the world economy given the Chinese trade links with the rest of the world.

The question today is to know who will take over from real estate to drive growth?

What does the slogan of "common prosperity" say?

Are foreign investors aware of these new challenges? It seems that yes. The markets did not digest the placement of Evergrande and Kaisa in default of repayment of their loans by the rating agency Fitch. Investors are starting to understand that growth in China will not be as fast as it used to be. This is precisely what Xi Jinping's new slogan implies: " 

common prosperity

 ". It denotes a change in economic policy.

The very liberal orientation of economic policy taken by the Third Plenum of the 18th Communist Party Congress in 2013 created a large number of imbalances. As pointed out by Mary-Françoise Renard, professor of economics emeritus at the University of Clermont-Auvergne and author of the book

China in the world economy. Between dependence and domination

(University Press Blaise Pascal, 2021), the difficulty for this country will be “ 

to make its transition to a new growth model in a context of constraints

. And the demographic constraint is not the least. Labor has become more expensive, and more skilled too. One of the challenges of this development will therefore be employment.

China is moving towards a high-tech economy.

A move upmarket which explains the takeover of the economy by power and the control of the technology sector by regulators.

The increase in living standards in China has been achieved through economic growth and not through the distribution of wealth,

” recalls economist Mary-Françoise Renard.

Maintaining social peace will be the priority objective of the Chinese authorities

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