The lingering real estate and banking crisis in China is starting to spill over to other aspects of the Chinese economy. With the real estate market struggling, many apartments and houses under contract not being completed, and landlords under contract refusing to pay their mortgages until the apartments are completed, the economic consequences of this crisis are beginning to unfold. spill over to other parts of the Chinese market. economy.
The steel industry is one of the main pillars of the Chinese economy. For decades, China’s national economy has depended on the real estate industry to provide an outlet for the huge amount of steel produced by China each year. Over the past two decades, the enormous amount of construction of skyscrapers, factories, huge apartment and housing complexes has been able to absorb the excess supply of steel produced by China’s steel industry. Steel was also the raw material for the manufacture of China’s nascent automobile industry, as well as the manufacture of key parts for automobiles produced overseas.
A key indicator of the health of China’s steel industry has always been China’s purchase of iron ore from overseas. In 2020, at the height of the Covid epidemic, China imported 1.17 billion tons of iron ore. In 2021, the quantity fell to 1.1 billion tons. In the first 5 months of 2022, China imported only 447 million tons of iron ore. This figure is down 5.1% compared to the same period in 2021. Some of these imports can be attributed to panic buying due to the Russian invasion of Ukraine.
Li Ganpo, founder and chairman of Hebei Jingye Steel Group, warned that a third of China’s steel mills could go bankrupt this year. According to a transcript seen by Bloomberg… “The whole industry is losing money and I don’t see a turnaround yet…”
Along with the decrease in the manufacture of finished steel products, there is the increase in the stock of finished steel products which increased by 20.5 million tons in a snapshot taken from the Chinese steel stock of June 1, 2022 to June 10, 2022.
Chinese Thoughts on Money
In the West, and in most of the world, money is an economic good. Money in the West is governed by the philosophy of a return on investment that creates more wealth. Money acts as an intermediary between the buyer and the seller. In China, according to geopolitician Peter Zeihan, money is seen by the CCP as political property.
According to Mr. Zeihan, “Investment decisions that are not driven by the concept of return tend to add up. Conservatively, corporate debt in China is about 150% of GDP. This does not take into account federal government debt, or provincial government debt, or local government debt. Nor does it involve the bond market, or non-standard borrowing such as LendingTree-like person-to-person programs, or parallel financing designed to evade even China’s hyper-lax financial regulators. That doesn’t even include US dollar-denominated debt that has sprung up in the rare moments when Beijing has taken some small steps to resolve the debt problem and so companies have sought funding outside of China. With this kind of attitude towards capital, it shouldn’t come as much of a surprise that Chinese stock markets are in essence gambling dens completely disconnected from issues of supply, labor, markets, logistics and cash. (and legality). Simply put, in China debt levels are simply not seen as a problem.
In China, money is a political commodity and only has value if it can be used to achieve a political goal. This political good is the maximum number of jobs.
The notions of rate of return or profit margins do not exist in China, and that is where the danger lies; the law of supply and demand will eventually prevail and the Chinese economy will face a correction. The longer it takes to deal with this economic correction, the greater the damage the inevitable correction will cause to the Chinese economy.
China is not capable of unstable economic growth
Without an impartial judiciary, the Chinese economy is incapable of “unstable growth”. Unstable growth occurs when a new technology increases the production of a good or service, which expands the economy at a rapid rate. Unstable growth can only occur in a business environment where an impartial judiciary is able to adjudicate contract disputes fairly. With the heavy hand of the Chinese Communist Party (CCP) interfering in court disputes and favoring CCP members in contract disputes, this type of coercion inhibits the search for new and promising technologies.
This means that the Chinese economy is stuck in stable growth. Stable growth depends on a constant amount of inputs to help the economy grow. However, at some point, the inputs do not result in growth because the marginal utility becomes saturated and has a zero growth rate.
A domino effect seems to be forming in the Chinese economy
A domino effect is defined as “…how an action can have a ripple effect on related matters. Knock over a domino, and you don’t just affect the first domino, but everyone in its path…”
In economics, a domino theory can be used to explain how economic weakness or loss can spread to other areas of the economy, causing a recession or depression.
In the current economic environment in China, the Evergrande implosion has begun to infect other sectors of China’s property market, which in turn have infected the Chinese banking system. With Chinese home and apartment buyers refusing to make further mortgage payments until the stalled construction of apartment complexes is complete, economic damage has spread to China’s banking system.
In July, thousands of Chinese depositors protested against the freezing of their money in rural banks in central China. In the city of Zhengzhou, protesters had gathered outside the main branch of China’s central bank to demand their money. The authorities sent police, disguised as civilians, to disperse the demonstration using violence and arresting the demonstrators.
With the halting of construction of many buildings and unfinished apartment complexes, the demand for steel has collapsed, which will inevitably lead to an increase in the unemployment rate for Chinese steel workers, many of whom are employed by public companies.
With a debt total that exceeds 300%, the Chinese government is sitting on a mountain of debt that many economic analysts say is an impending disaster. Some analysts say that since the debt belongs to the state, there is little chance of default.
With the implosion of the Chinese real estate market, which seeps into the Chinese banking system, which in turn affects the Chinese steel industry, China is facing a hurricane of economic problems all happening at once.
It is not inconceivable that these piling up crises could lead to a sudden economic collapse of the Chinese economy.