Categories: Economic News

Beijing is affecting the national economy and helping the world

The writer is the founder of The Overshoot 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 borrowing and developer leverage. 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 about two-thirds of the world’s iron ore and metallurgical coal and about 40% of its 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.

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 land sales so far this year was 31% lower than in the first six months of 2021.

While local government bond issuance is soaring (the amount raised in May and June 2022 was the largest two-month total on record), this mainly reflects cash flow shortfalls cash rather than new investment expenses. Desperation means some local governments are raising money with yields of around 9% from household savers, even as the central government issues 10-year bonds with yields of less than 3%.

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 more than 10% below the pre-pandemic trend. Chinese oil refineries have been processing 10% less crude since April compared with last spring thanks to falling oil demand. 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.

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 rising prices and China’s real import demand has fallen 8% 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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