The Coming Fall of China’s Economy?

The Red Dragon has been slain by multiple economic swords, from the Evergrande crisis to mounting debt levels to power outages throughout the country. But did China's economy head off a cliff when former President Donald Trump initiated a trade war? Or was Beijing's inevitable demise accelerated by the coronavirus pandemic? Whatever the case may be, all the signals indicate that the 21st-century will not belong to President Xi Jinping and his merry band of Communists.

A Summer Slowdown

In the third quarter, the gross domestic product (GDP) growth rate was 4.9% year-over-year, falling short of the market forecast of 5.2%. This was also down from the 7.9% growth in the second quarter. On a monthly basis, the GDP expanded just 0.2%, below the estimate of 0.5%.

China's disappointing GDP was driven by weak industrial and construction activity in the July-September period. Energy disruptions also weighed on the world's second-largest economy, with the National Bureau of Statistics (NBS) conceding that the nation faces a plethora of "domestic and overseas risks and challenges."

It was not all bad news to close the third quarter. Retail sales ballooned at an annualized rate of 4.4% in September, topping estimates of 3.3%. In addition, the unemployment rate dipped to 4.9%, although market analysts note that this was caused by more people leaving the labor market.

The deteriorating situation is not going unnoticed. Ten major financial institutions have trimmed their full-year economic projections. Goldman Sachs reduced its GDP forecast from 8.2% to 7.8%. JPMorgan and Chase cut its estimate from 8.7% to 8.3%, while Morgan Stanley lowered its outlook from 8.2% to 7.9%. Credit Suisse and UBS left their forecasts of 8.2% unchanged.

Slowing consumer spending, the supply chain crisis, disruptive floods, regulatory uncertainty, and indebted real estate developers forced these banks to become slightly more bearish on China. Still, compared to the rest of the world, China's economic expansion will likely surpass global growth of about 5.9%, according to the International Monetary Fund (IMF).

What’s the Deal With Evergrande?

As Liberty Nation recently reported, China Evergrande Group, the troubled real estate developer, failed to pay bondholders again. For the third time in a month, the property giant missed interest payments on offshore bonds totaling $148 million. Industry observers anticipate that Evergrande will also not be covering $150 million in upcoming obligations.

But Evergrande is not the only juggernaut in the property sector to implode. A growing number of other real estate behemoths are on the edge of the pecuniary mountain. Sinic Holdings warned that it would not repay offshore bonds worth $250 million. China Properties Group defaulted on $226 million in notes, and Fantasia Holdings did not cover a $206 million bond payment.

Chinese officials continue to reassure investors and banks that there is no big trouble in little China. People's Bank of China (PBoC) Governor Yi Gang has attempted to calm everyone down by noting that authorities will ensure that Evergrande's issues will not spread to other property businesses. Other regulatory leaders assert that the government could loosen policies for corporate bond markets and project loans, which, they say, could mitigate these setbacks. But does anyone believe them?

Multiple credit rating agencies have put forward a series of downgrades for many of the country's real estate firms, including China Aoyuan, Modern Land, and Greenland Holdings. The Bloomberg Intelligence (BI) China Real Estate Owners and Developers Valuation Peers index, a gauge of Chinese developers, has also been declining.

No Yuan Sees a Debt Tsunami

Despite all the focus on the real estate sector's growing debt problems, this pales in comparison to another red ink tsunami that could cripple the nation: local government financing vehicles (LGFVs). Liberty Nation had previously reported on these intensifying debts, but Goldman Sachs has officially rung alarm bells, warning that China's hidden local government debt is swallowing half the size of the economy.

The Wall Street titan stated that LGFV increased to $8.2 trillion by the end of last year, representing 52% of China's gross domestic product. Although financial markets still view it as a government liability, provinces utilize LGFVs to borrow much-needed money without the money appearing on balance sheets. Put simply, local governments close their eyes when they open their monthly credit card statement and declare that they are fiscally responsible.

According to the report, Jiangsu is the most leveraged province in China, followed by Tianjin, Beijing, Sichuan, Guizhou, and Gansu. The other key finding was that nearly two-thirds of these bonds are employed to cover maturing 2020-2021 debt rather than new investment.

"More official local government bond issuance and increased flexibility on local government financing are probably needed to support overall economic growth," Goldman economists wrote in their findings.

Make Balance Sheets Great Again

The COVID-19 public health crisis decimated government balance sheets across the globe. Be it the United States, Europe, or China, the pandemic exacerbated governments’ fiscal imbalances and obligations. Leaders have attempted to alleviate their financial troubles through money-printing, borrowing, and taxing. However, as the debts and deficits balloon, there is no Keynesian panacea to the coming economic collapse – in China and the rest of the world. Like other advanced economies, Beijing might view a much-needed recession as a sign of weakness. To paraphrase a Chinese proverb: He who cheats economics will be cheated by economics.

~ Read more from Andrew Moran.