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China’s Economic Crisis: The Storm Within

Lourenço PéD'Arca
Market Monday December 11th 2023

Hong Kong’s Hang Seng Index (HSI) surged remarkably in January 2023, marking a strong start for the Chinese economy that year. However, it’s taken a nosedive since then, plummeting by over 20%. Simultaneously, the Yuan is reaching its lowest levels in the past 16 years. This rapid downturn has everyone wondering: What triggered this sudden spiral?

Over the past decades, China has experienced consistent expansion, setting itself apart from the slower growth of developed nations. This robust growth significantly supported the progress of countries in Africa and Asia. However, recent news and discussions emphasize the weakening state of the Chinese economy.

The Chinese construction market has plummeted by 16.69% since last year. This decline appears to be driven by factors inherent to this industry. The sector had been buoyed by the dream of ‘’endless demand’’, leading companies to accumulate debt in anticipation of a sustained housing demand. However, accordingly to expectations held by Western countries, this demand did not materialize. Presently, the Chinese Construction Industry’s price-to-earnings ratio is rapidly declining, reaching lows comparable to those seen during the Covid-19 period, revealing a lack of investors’ interest in that market. Following this fact, the Chinese retail sales, for instance, saw an annual expansion of 3.1% in June, a substantial drop from the 12.7% increase seen in May.

The sole feasible opportunity to offset the GDP losses, due to the crisis in the construction market, would be if the Chinese population started consuming more. However, the population’s fear about spending is causing a delay in this regard, preferring to hoard the money.
Knowing this, the government decided to implement some regulations through the National Development and Reform Commission in China*, where they instructed local governments to ease restrictions on car purchases and implement measures to encourage the acquisition of new vehicles, as well as to promote the consumption of household appliances through exchange and recycling measures.

Despite this attempt, the inevitable occurred. A big symbol of capitalism in China, China Evergreen*, had to default on its debt obligations, filling for bankruptcy. Following that lead is the fifth biggest Construction company, Country Garden Holdings, which is closer, day by day, to the Chinese chapter 7*.
So, now, the Real Estate companies have about 7.2 million* new homes, vacant, and liabilities from the debts to be paid.

Plus, the housing problem isn’t only about the new homes… Chinese population who have more than one house across the country tried to sell them as quickly as possible, in a effort not to lose their money in that investment.
These events made the housing market plumb even more.

In a desperate attempt to contain the crise coming at fast pace, the Chinese government raised $9.6 billion, in the first round of fundraising, to financially sustain construction companies. They also advocated for easier access to credit for these same businesses.

Once responsible for 30% of Chinese GDP growth, the Construction Market is now set to fuel its decline… a sight as cold as the vacant buildings that dot the cityscape.

*National Development and Reform Commission in China- It's a powerful governmental agency responsible for macroeconomic planning, policy formulation, and economic reform.
*China Evergreen- 6th biggest property market company
*Chapter 7- Chapter 7 bankruptcy, within the United States' bankruptcy code, is a legal process designed to provide relief to individuals or businesses drowning in overwhelming debt.
*7.2 million- according to Reuters calculations
*National Development and Reform Commission in China- It's a powerful governmental agency responsible for macroeconomic planning, policy formulation, and economic reform.
 

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