China's powerhouse economy is sputtering after 40 years of stunning growth, putting investors and international leaders on edge.
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- Hong Kong's Hang Seng Index slid into a bear market on Friday, having fallen more than 20% from its recent peak in January.
- The Chinese yuan last week fell to its lowest level in 16 years.
- China's real-estate titans are flirting with insolvency after decades of debt-fueled growth.
- Major investment banks have cut their forecasts for China's economic growth to below 5% — a level the nation hasn't seen, minus the Covid years, since the early 1960s.
- Consumer prices are falling, exports are in a slump, and unemployment among youth has gotten so bad the government simply stopped publishing the data.
What happened?
The economic model that prioritized growth at all costs and lifted at least 800 million Chinese out of poverty is broken. And Communist Party leaders in Beijing are struggling to balance ideological goals with the economic realities of the country's post-Covid era.
There are three key areas where China is faltering, my colleague Laura He reports.
1️⃣ A real estate boom goes bust.
It's hard to overstate how important real estate is to China's economy. The industry accounts for as much as 30% of the country's economic activity, and more than two-thirds of household wealth is tied up in real estate.
But two years ago, the central government moved to curb excessive borrowing to try to slow the rise in home prices, effectively cutting off a major source of funding for property developers and triggering a string of defaults.
Global investors are now closely watching Country Garden, once the country's largest developer by property sales, after it missed interest payments on two US dollar bonds this month.
The turmoil is spreading to the financial services industry. Last week, Zhongrong Trust, which managed $87 billion for corporate clients and wealthy individuals, failed to repay a series of investment products to at least four companies.
2️⃣ Local governments are drowning in debt.
During the 2008 financial crisis, Chinese leaders rolled out a $586 billion fiscal package to blunt the effects of the global downturn.
It was a huge success, but the government-led infrastructure projects led to an unprecedented credit expansion.
Analysts now say China is too indebted to juice the economy like it did 15 years ago.
"Policymakers appear concerned that their traditional policy playbook would lead to a further rise in debt levels that would come back to the bite them in future," said Julian Evans-Pritchard, head of China economics at Capital Economics.
3️⃣ Its population is in crisis.
Earlier this year, Beijing released data that showed China's population started shrinking last year for the first time in six decades.
The country's fertility rate — measured by the average number of babies a woman will have over her lifetime — dropped to a record low of 1.09 last year from 1.30 just two years before, according to one report.
That leaves China with a rapidly shrinking labor supply and an aging society that will create greater demand for healthcare and social spending. It also leaves fewer people looking for homes, exacerbating the housing glut and further damping prices.
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