Breaking down the current state of China’s Economy
China’s economy has been facing substantial challenges. China was once one of the fastest-growing economies in the world, but this sustained expansion was disrupted due to prolonged COVID-19 restrictions followed by an unprecedented real estate crisis. Real estate used to represent roughly 30% of China's GDP. Interest in the real estate sector had already begun to diminish, with consumer demand dampened by the extended COVID-19 restrictions. The nail on the coffin for the real estate sector was when the government decided to crack down on the risky practices followed by enterprises. As part of President Xi Jinping’s efforts to tighten regulations on the practices followed by major corporations in China, more than 100 regulations were implemented targeting companies that raised large sums of money through equity, IPOs, and borrowings.
As part of these regulations, strict limits were imposed on the amount of money that companies could raise through borrowing. The company that was most severely affected by this policy was Evergrande, back in 2021. Evergrande had borrowings exceeding $300 billion, which included $19 million in offshore US dollar-denominated bonds. As a result of this policy, Evergrande failed to meet its debt obligations, leading to the unfolding of the debt crisis in China. Since then, companies that account for about 40% of the home sales in China have proceeded to default, and China’s real estate sector is still struggling to recover. Adding to the challenges, Country Garden one of China’s biggest property developers, reported a loss of $6.7 billion in August for the first six months of the year. This has sparked concerns about possible defaults. The company has $11 billion in debt and another $6 billion in onshore loans, and a default by them would send another ripple through an already struggling sector. Given the substantial reliance of the Chinese economy on the real estate sector, the bleak outlook for this industry has presented a substantial challenge for the economy.
China’s economy grew by 4.9% between July and September, compared to 6.3% in the second quarter. Further, China’s exports fell significantly, and overseas shipments fell by 6.4% YoY. Subsequently, the country's leaders are making efforts to bolster the ailing economy by implementing a shift in its economic structure. They are advocating for greater investments in the manufacturing sector, particularly in sectors like electric cars and semi-conductors, while also expanding central borrowing. The effectiveness of these measures and the government's ability to enact the essential changes needed to steer the struggling economy toward recovery remain uncertain.
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