The writer is the founder of the excess and the co-author of Trade Wars Are Class Wars.
China’s crackdown on real estate developers and its draconian “Covid Zero” policies are bad news for most of its people, as well as for overseas companies hoping to make money from Chinese customers.
But China’s domestic woes have an upside: Lower demand for imported metals, energy, food and capital goods is easing inflationary pressures in the rest of the world. For the first time in decades, the country’s huge trade surplus is a boon for workers elsewhere.
The housing market slump began last summer in response to government restrictions on mortgage lending and leverage by developers. Homebuilders sold an average of 156 million square meters per month of residential space from April to June 2021. This year, during the same period, Chinese developers sold just 106 million square meters per month .
The fall in demand has been towards new building, with the amount of ‘residential space started’ between April and June 2022 almost halving compared to last year. The pace of home building hasn’t been this slow since 2009.
The result is additional supply for the rest of the world. Iron ore, metallurgical coal and copper are essential materials for making construction steel, household appliances and electrical wiring. Before the recent recession, China consumed approx two-thirds of the world’s iron ore i metallurgical coal i about 40 percent of the copper. Less demand means lower prices. Compared to the recent July 2021 peak, iron ore futures have halved, while Chinese metallurgical coal prices have fallen by about a third. Global copper prices have fallen by a quarter despite an expected tailwind from additional climate-related green investments in the US and Europe.
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This has wider ramifications. Residential real estate is also the only asset class widely available to Chinese savers outside of bank deposits, reducing the value of Chinese stocks and bonds. Until recently, Chinese consumers borrowed from banks to buy new homes, which had yet to be built, as investment properties. Now, developers can’t finish their projects because of a lack of cash, some would-be homebuyers are refusing to pay their mortgages, and some local banks are holding depositors.
In addition, China’s provincial and local governments had relied on revenue from land sales to cover about a third of their spending. This money is no longer coming. According to China’s finance ministry, local government revenue from the sale of land so far this year they were 31% lower than in the first six months of 2021.
While the local government bond issuance is skyrocketing — the amount collected in May and June 2022 was the largest two-month sum ever; this mainly reflects cash flow shortfalls rather than new investment spending. Desperation has some local governments collecting money at around 9% of returns from household savers, even as the central government issues 10-year bonds in yields less than 3 per cent.
The impact of the housing crash in China is being exacerbated by government restrictions related to Covid. Chinese consumer spending in the first half of 2022 was barely higher than in the first half of 2021 after adjusting for inflation, and is now on track more than 10% below the pre-pandemic trend. Chinese oil refineries have been processing 10 percent less crude oil since April compared to last spring thanks to falling demand for gasoline. Electricity consumption, which had been growing by 7% a year before the pandemic, is now growing by only 2%. China’s weakness has been a powerful counterbalance to the strain on global energy supplies caused by Russia’s invasion of Ukraine.
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China’s domestic weakness is crushing demand for goods from the rest of the world. In dollar terms, import spending has been flat since late last year. Factor in the increase in prices, and China Real import demand is down about 8 percent since the blockades began, according to estimates from the Netherlands Office for Economic Policy Analysis. China’s exports continue to rise, however, providing foreign consumers and businesses with the goods they need.
In the past, the massive imbalance between China’s healthy exports and weak imports was a drag on the global economy, depriving workers elsewhere of the income they would have earned by selling goods and services to Chinese customers. But now that inflation and commodity shortages are bigger concerns than underemployment, China’s problems may be just what the rest of the world needs.
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