![]() By restricting lending, both new construction and the country’s overall economic growth quickly slowed. ![]() Here’s the dilemma: China can’t have it both ways. Not surprisingly, the largest component of China’s business debt is real estate loans. It is a stultifying level compared with 81% in the US, 117% in Japan (the world’s third largest economy), and 72% in Germany (the world’s fourth largest economy). With its construction boom, China, the second largest economy in the world, racked up a business debt level of 157% of gross domestic product. These are its now-famous “three red lines” policy that many of housebuilders couldn’t meet so their new construction efforts ground to a halt. However, in 2020, China’s government began to worry about the housing excess and the overleveraged state of housebuilding sector companies and imposed much stricter lending criteria. These companies had been able to overbuild because their lenders – mainly China’s banks – used exceedingly lax criteria in making the loans the companies needed. The same fate has now cascaded to hundreds of more developers, raw-material suppliers, and contractors. But overbuilding permeates the entire housebuilding industry in China, so companies including Kaisa, Fantasia, and Shanghai-based Shimao Group soon followed suit. Why will China’s growth remain below its historically higher levels?įirst and foremost, it had achieved that high growth rate through rampant construction of housing and other real estate, but it built so many houses and apartments that an estimated 50 to 100 million are empty across the country.Ī prime perpetrator of this insanity was a company called Evergrande which went through a massive, headline-grabbing debt default in 2021. ![]() That 7% is a lofty level it will struggle to ever consistently re-attain. ![]() The world’s second largest economy may have reached its zenith, says Richard Vague.Ĭhina failed to deliver anything close to its historically-robust growth in the September 2022 quarter, with 3.9% against the 7% average annual rate it reached in the five years before Covid. ![]()
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