$30 Trillion Destroyed: China’s Terrible 2024 - Year In Review

Today on China Update we look at China's economy in a 2024 year in review.

China Update provides listeners with the most up to date political, economic, and geostrategic analysis on China - so that you are on top of the world's number 2 economy.

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Episode Transcript

Speaker 1 (00:00):
Happy Tuesday, everybody. Welcome to another episode of China Updates,
where I provide you with the most up to date political, economic,
and geostrategic analysis on the world's number two economy. My
name is Tony. Let's jump in. Today, of course, is
the final day of twenty twenty four, so I thought
it would be a good opportunity to look back at
the year, especially with the domestic economy, which has been

(00:22):
in such a bad place and has taken up so
many headlines this year. At the beginning of this year,
in the first week of January of twenty twenty four,
on China Update, we discussed five areas to follow closely
in twenty twenty four in order to judge the economic
health of the country. It had been a year since
China had abandoned its disastrous zero COVID policy and almost
three years since the evergrand collapse triggered the property crisis.

(00:46):
It was some optimism in the air at the time.
Over the last twelve months, however, this optimism has evaporated.
Every major issue facing policy makers has intensified. The structural crises,
especially around property, Local fiscal conditions and the growth model
remain unsolved. Re Examining these five areas from the first

(01:07):
week of January only reinforces this feeling. That is what
we'll do today. So the five areas that we discussed
at the beginning of this year, we're one can China
avoid a deflationary spiral? Two? Will the government tackle the
debt deflation spiral with greater stimulus? Three? Can private sector
confidence be restored? Four will foreign direct investment into China rebound?

(01:31):
And five can the government stem the property downturn? On
each of these questions the answer has been negative. Today,
we'll move through each one looking at how the government
did this year and what the outlook is based on
these criteria. If you get some value from today's episode
of China Update, don't forget to the like button. If

(01:52):
you haven't done so already and you'd like to continue
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continue to produce free episodes open for all six days

(02:16):
a week. Thank you so much. Now, Dad said, let's
jump into this year of review. One. Can China avoid
a deflationary spiral? Prices for goods leaving Chinese factories have
fallen year on year for twenty six consecutive months, dropping
two point five percent in November last month from a
year earlier, and there is little sign of them turning

(02:38):
up again soon. China's gross domestic product deflator, a broader
gauge of price levels across the economy, has been a
negative territory for six consecutive quarters, the longest stretch since
data has been available in the nineteen nineties. Some economists
expect producer prices to continue in negative territory at least
through next year, with Mura expecting China's producer price index

(03:02):
to be down one point two percent, while the Quarry
estimates a one percent fall in twenty twenty five. Bag
of America and Goldman Sachs are forecasting producer prices to
be flat next year. The problem is that once expectations
for lower prices become entrenched, it is hard to turn
them around. As Sir Prasad, Professor of tre Polosy at

(03:23):
Cornell University and a former head of the International Monetary
Fund's China division, said back in August, to quote, the
longer deflation lasts, it becomes entrenched in two people's expectations
about future economic prospects, it becomes harder and harder to
use macroeconomic stimulus end quote, which brings us to two.

(03:45):
All the government tackle the debt deflation spiral with greater
stimulus after months of disappointment from markets with Beijing's limp
stimulus measures, with the only jump in stock prices occurring
in September from a very low base. After news off
a big stimulus push three weeks ago, the twenty four
man Politburo said it would implement more proactive fiscal policy

(04:07):
and adopt a moderately loose monetary policy next year, the
first introduction of such language since two thousand and eight.
While this did get hopes up for some analysts, markets
still remained unimpressed. Sheijimping appears to be committed to boosting
growth through more manufacturing, shifting state directed investment away from
property and infrastructure, torn so called new production forces like

(04:30):
semiconductors in evs. This is why we've seen an explosion
in ev production this year. Exports have surged two while imports,
a proxy for consumption, have declined. General Secretary Chi Jinping
reportedly views US style consumption driven growth as wasteful. However,
as we have explored on previous videos, Beijing has seen

(04:51):
heavily reduced bang for its buck with supply side stimulus
for years now, and most local governments do not have
the fiscal space to contain new such policies for much longer.
Three can private sector confidence be restored, as we can
see here. According to the National Bureau of Statistics itself,
consumer confidence collapsed in April twenty twenty two, when Shanghai

(05:15):
and other big cities were locked down to fight the
COVID nineteen pandemic. It is yet to recover. China's retail
sales growth unexpectedly weakened in November of this year, highlighting
the urgency for Beijing to further encourage residents to spend,
so far to no success. According to numbers collected by
gavecal Dragonomics consultancy based in Beijing, corporate confidence has deteriorated

(05:37):
over the past year, even faster than new orders. One
explanation for the shattered confidence from businesses and households alike
is due to the bad shape of the economy. Some analysts, however,
argue that China's gloom reflects deeper problems. Adam Posen of
the Peterson Institute for International Economics is argued that faith
in China's policy making was shattered by the pandemic lockdowns,

(05:58):
as well as by abrupt regulatory crackdowns on some of
China's most celebrated companies. All of this, of course, we
followed at the time next four will foreign direct investment
into China rebound? In twenty twenty three, China reported its
smallest annual foreign direct investment since the nineteen nineties. It

(06:20):
was hoped that this would turn around in twenty twenty four.
It didn't. Foreign investment into China has slumped in the
past three years after hitting a record in twenty twenty one.
According to the most recent official data from the State
Administration of Foreign Exchange, China's direct investment liabilities and its
balance of payments dropped eight point one billion US dollars

(06:40):
in the third quarter of this year. The gauge, which
measures foreign direct investment into China, was down almost thirteen
billion US dollars in the first nine months of the year.
Should the decline continue for the rest of the year,
it would be the first annual net outflow of FDI
since at least nineteen ninety when comparable data began. That

(07:00):
is to say, the first time ever on record. Domestic
money isn't much different. China suffered its biggest outflow on
record from its financial markets last month in November. As
the prospect of high US tariffs pose more risks for China,
Weaknesses in the Yan, China's currency and local stocks, as
well as the nation's wide interest rate gap with the US,

(07:22):
are raising the risk of a vicious cycle of capital outflows.
Now we look at the area where perhaps policymakers have
performed the worst. Five Can the government stem the property
downturn despite literally dozens of measures over several months. The
answer to this in twenty twenty four has been no.

(07:43):
Beijing has introduced a slew of measures to support the
property market this year. It's made it easier and cheaper
for people to buy homes, while providing government lending to
developers so they can finish projects. It has also put
tens of billions of dollars aside so local governments can
buy up excess properties and make them into so called
five audible homes. None of this has solved the crisis.

(08:04):
After a very brief and mild recovery in October, residential
sales fell again in November. National used home prices have
declined for thirty nine straight months through October. Indeed, in
a December report, US Bank Goldman Sachs wrote that new
home starts and government revenue from land sales plunged by

(08:24):
sixty to seventy percent from their peak in the twenty
twenty through twenty twenty one period. New home sales and
completions almost halved in the latest data. Incredibly, the value
of new homes is down over fifty percent. This is
tens of trillions of dollars of value destroyed. At least

(08:45):
thirty trillion US dollars of household wealth has been wiped
if we include damage done to all asset prices. According
to Ewang, head of China real estate research at Goldman
Sachs in a different report, also recently released, property price
and most cities have returned to twenty seventeen levels and
continued to fall. So no, Beijing has not turned the

(09:08):
property crisis around the year. The crisis now enters its
fifth year of festering. Frankly, though it is not surprising
that Beijing has failed to turn the property crisis around,
the size of the problem is truly titanic. China's real
estate bust left tens of millions of empty housing units,
as many as ninety million empty housing units, with thirty

(09:29):
one million fully or partially built but never sold, and
the rest were purchased but set empty. Assuming three people
per household, that's enough to house the entire population of Brazil.
According to a recent survey Baysed City Research, approximately seventy
four percent of Chinese households and first and second tier
cities owned more than one home across China, while nearly

(09:51):
twenty percent owned three homes or more. Filling these homes
would be hard enough even if China's population were growing,
but it's not. Rather, it is exp to fall by
two hundred and four million people, and that is a
conservative estimate over the next thirty years. Then there is
an additional twenty million units which were sold but were
left largely unbuilt by developers due to cash flow problems

(10:12):
and poor market conditions. The situation for developers are just
as bad as households, and we'll touch on that shortly.
This is a text book bubble, and it is still deflating.
In the prices in major cities, which will likely suffer
far less than poorer regions, still remain very high. In
cities like Shanghai and Beijing, the price to income ratio,

(10:33):
the cost of housing relative to annual wages, has reached
staggering heights. Shenjin boasts one of the world's most unaffordable
property markets, where the average home costs forty three times
the median annual income. In similar metropolises like London or
New York, the ratio hovers around fifteen to twenty. So
China faces the worst of both worlds, a property market

(10:54):
that is still deflating a year's long housing crisis, while
at the same time, the most most popular cities the
major cities still have home prices that are frankly ridiculously unaffordable.
The empty units, however, owned by millions of Chinese across
wealthy cities, is the primary time bomb. However, Tien Le Huang,
a research fellow at the Peterson Institute of International Economics,

(11:16):
speaking to US base the Wall Street Journal back in
September explained quote, Fundamentally, there are not enough people to
fill the homes. I don't think the housing oversupply problem
has a solution. Really, it's the problem of declining demographics.
Ghost cities will remain ghostly quote and to quote a
Bloomberg Economics report from last week, economists think both home

(11:39):
prices and sales in the country will fall next year.
The best they can say the decline may be slower
than at once in twenty twenty four. Others are more pessimistic. However,
George Magnus, research associate at the University of Oxford China Centre,
believes real estate will be a drag on the economy
for at least five more years, recently expressing quote, we

(12:02):
have definitely passed peak property in China. The government cannot
do anything to prevent this and can only try to
smooth the transition or make it less uncomfortable. In quote.
In the December report mentioned above, Goldman Sax economists see
quote no quick fix for the nationwide property sector. I'd
expect the downturn to be a multi year drag on

(12:22):
growth for the Chinese economy. In quote, adding that the
property sector will likely weigh on China's GDP growth by
two percentage points in twenty twenty five. The team expects
the growth drag to linger until twenty thirty as China's
property debt crisis enters its fifth year. There's little indication
that distressed developers are finding it easy to repay debt either.

(12:43):
Their dollar bonds are still trading at deeply depressed levels
and their debt issuance has nearly dried up. Chinese businesses
and households were more overinvested in real estate than Americans
were before the two thousand and eight global financial crisis,
but the strong role of the government, which has not
allowed property prices to fully fall, has caused the crisis

(13:04):
to become more of a prolonged illness with all its
systemic side effects, than a sharp shock, an illness which
the country will carry into twenty twenty five. Twenty twenty
four has been a big year. I want to thank
all regular viewers, those who have been with the channel
for a while, as well as new subscribers and new

(13:24):
viewers for coming along on the journey this year. There
has been a lot to cover. It has been a
lot of work, but it has truly been a pleasure
and a privilege for me to be able to share
these efforts to understand this complex and interesting country through
all its vicissitudes in what could well be a historic
turning point for the country and the world. It is
increasingly clear that twenty twenty five will be a very

(13:46):
consequential year, not just for China's economy and its implications
for the rest of the world, but geopolitically, as tensions
on the trade and security front with the United States,
regional actors like Japan and players in Southeast Dasia, as
well as a deepening trade conflict with the Europeans and
relations growing tighter with Russia and others, will likely all

(14:08):
come together to spell what will be a significant year
of developments in twenty twenty five. For those who follow
China update in twenty twenty four, I hope you will
join us as we continue to follow this country into
next year. Thank you so much for all your continued support.
I hope you've had a good twenty twenty four and
I wish you all happiness, health and prosperity in twenty

(14:32):
twenty five. Happy New Year, and I will see you
next year.