2023 crisis will start from China

9 reasons why the 2023 crisis will start from China. And why can the Chinese economy destroy world one?

Briefly about key waves of problems that create conditions for tsunami:

1. China's real estate market

You probably haven't forgotten about the situation with the bankruptcy of the largest developer Evergrande Group? Who could not pay off debts of $300 billion.

In August 2022, Evergrande once again defaulted on debt restructuring obligations…

Evergrande is a huge company, it employs about 200,000 people, has sales of more than $110 billion in 2020, and owns more than 1,300 buildings in more than 280 cities.

Analysts have long been concerned that the collapse of Evergrande could trigger wider risks to China's property market, hurting homeowners and the financial system in general.

Just imagine, real estate and related industries make up to 30% of GDP in China's economy (!!!)

After Evergrande defaulted, several other major developers, including Shanghai-based Kaisa, Fantasia and Shimao Group, also sought protection from creditors.

Chinese private investors began to sharply reduce the volume of payments for real estate bought in installments, which aggravated the situation in the construction sector.

Developers only completed about 60% of pre-sold homes between 2013 and 2020, while China's outstanding mortgage loans rose by 26.3 trillion yuan ($3.9 trillion) over the same period, according to Nomura analysts.

Citi analysts say the boycott could increase Chinese banks' hopeless debts by $83 billion and cause social instability at a time when the country is already struggling with growing protests over the deteriorating condition of small rural banks.

As a result, serious liquidity problems appeared in Chinese banks as well.

China's five largest banks have demonstrated losses from the ongoing crisis in the real estate sector, with bad debts related to real estate rising sharply in the first half of 2022, despite modest profits amid the economic slowdown.

In the summer of 2022, a wave of protests by depositors swept through China, whose deposits were frozen for $6 billion (!!!).

Chinese authorities are concerned not only with financial risks but also with potential social instability caused by the failure of rural banks and other small and medium-sized enterprises.

Banks in China are already reporting $312 million in bad loans as a result of the mortgage boycott.

A debt crisis of seismic proportions has brought some of the country's largest developers to their knees, while a wave of Covid-19 lockdowns that swept through manufacturing centers and commercial hubs over the summer has halted production.

In a report published last week, S&P Global Ratings estimated that property sales in China could fall by a third (!) this year due to mortgage strikes, as people believe that developers will not be able to complete pre-sales in time, the most common way to sell homes in China.

To summarize, the real estate sector, which forms up to 30% of China's GDP, is very seriously at a fever pitch and affects the banking sector and through entire Chinese economy.

2. Debts of provinces

Another problem sector in China is the debts of provinces (in our analogy, of regions and municipalities).

China's local governments are facing a $2 trillion debt squeeze.

More than 40% of outstanding provincial debt is repayable within five years.

The government of 31 China provinces has a debt volume of 120% of the income of provinces (!).

For reference: China has 34 provinces.

Do you understand the scale of this problem?

3. Debts of China

Everything here is simple and complicated at the same time.

China's gross debt (total China debt, which includes obligations of the state, companies and households) has reached a record level, exceeding GDP by 3 times (!).

The main reason for this growth is to stimulate the growth of China's economy (otherwise the world would never have seen such economic growth rates of 10%-11%-14% per year).

And also — fight against the consequences of covid and support of the national economy.

For China's GDP of $17.7 trillion, loans to the non-financial sector amounted to $51.87 trillion, or 295% of the GDP.

For comparison, the amount of such debt is 263.5% in the USA, 257% in Great Britain, and 195% in Germany.

4. Bankruptcies of banks

It is important to note that the Chinese Central Bank keeps its finger on the pulse.

Due to the growth of bad loans in China, the risks of bank failures have increased.

And already in 2022, three markets were saved.

But risks haven't gone away and seem to be even stronger in 2023.

5. China's aging

The one-family-one-child policy has led China to irreversible consequences.

- First, China's population is shrinking.

China's population will drop from 1.426 billion this year to 1.313 billion by 2050 and below 800 million by 2100, according to UN projections.

- Secondly, the Chinese population is aging.

The average age will increase from today's 38.5 years this year to 50 years in 2047.

These indicators directly affect the economy, its productivity, and changes in the consumer market.

And all these indicators will enter a negative trend. That will intensify already accumulated problems.

6. Hidden debts to other countries

Chinese loans leave developing countries with $385 billion in hidden debt.

As practice has shown, China acts in the same way as the Soviet Union did before — it wastes money to buy governments, and assets, obtain profitable contracts, and seize new territories.

History of the Soviet Union has shown that the lion's share of these loans is written off (forgiven).

So, China has another "hole in the budget" ahead of it.

National China debt today is about $13 trillion. At the same time, China's GDP today is $17.7 trillion. Not much more.

7. Falling growth rates of China's economy

In 2021, China's economic growth rate exceeded 8% per year. The best indicator in 10 years.

But China's economy is slowing in 2022, with year-on-year GDP growth falling to 0.4% in April-June 2022, the second lowest since 1992.

Economic recovery is being held back by the combined impact of COVID and the downturn in the real estate market.

Entire regions were blocked, supply chains were disrupted, this raised prices of raw materials, affected production volumes in almost all sectors of the economy, as well as financial indicators of companies and revenues to the budget.

World Bank predicts GDP growth in China — the world's second largest economy — at only 2.8% in 2022 (!!!).

In 2023, the growth of the world's second largest economy will be 4.5%. Or will not constitute.

For 2022, China also planned 5.5%, but the result turned out to be worse by more than 2 times.

China's slow economic growth is exacerbating the effects of debt crisis.

As I wrote above, China's total gross debt exceeded 300% of GDP.

The national debt of China today is about $13 trillion. At the same time, China's GDP today is $17.7 trillion.

Not much more.

Quite risky, but if you remember that servicing China's public debt costs about 2.5%-2.9% per annum (depending on the maturity of the bonds).

So when your economy is growing by 10% per year, you can safely borrow at 2.5% annual amount in the amount of 100% of GDP and even 200%.

But when economic growth slows to 3% a year and gross debt exceeds 300% a year, there are serious risks of parade of domestic defaults and debt servicing problems for China itself.

8. Pursuit of weapons

China openly declares its claims on Taiwan and is preparing for direct military confrontation.

Russia's bad experience forced China to reconsider its plans and increase spending on weapons.

In particular, for 2022, experts estimate China's real military budget at $229 billion.

With growth of up to $400 billion by 2030.

The source is China's budget, which is already bursting at the seams.

9. Problems with filling the budget

A week ago there was news that China's budget deficit has already exceeded $1 trillion (25% of the budget).

The key reason is China's fight against covid and the consequences of this fight for the economy.

The combined incomes of the population and budgets of state funds for the first 11 months of the current year amounted to 18.6 trillion yuan. This is 3% less than a year earlier.

Property tax revenues for the first 11 months of the year fell 23.8% compared to the same period in 2021.

So, adding all 9 reasons together, we can expect a "perfect storm" in China, which, turning into a tsunami, will spread to the whole world because China's share in the world economy is 18.5%!

It won't be easy for anyone!

But — "warned, means armed!".

About the author: Anatoliy Amelin, co-founder and director of economic programs of the Ukrainian Institute for the Future

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