The iron-veiled China’s communist Fascist government cannot hide the truth about its failing economic collapse. The latest setback which the dragon has suffered is the filing of bankruptcy by the biggest real estate giant of China that is Evergrande Group. Of late, China’s real estate sector has been in severe turmoil as prominent developers failed to complete their projects, thereby resulting in massive protests by home buyers.
China’s Evergrande Group, sought protection under chapter 15 of the US bankruptcy code, which protects its US assets as it looks forward to a restructuring deal.
Evergrande’s troubles started in 2021; Another big name reels under severe debt
In 2021, after the Chinese government stepped up scrutiny on the real estate sector, the woes of Evergrande were aggravated. It had liabilities worth $300 billion. In the wake of the financial woes of Evergrande, the Chinese economy was shuddering. For 2021-2022, Evergrande posted a combined loss of $81 billion.
Another big developer by sales, Country Garden too is facing a financial crunch as it has already delayed two international bond payments. In fact, owing to the liquidity crisis, Country Garden could not clear its debt, which was $200 billion by the end of 2022. It has been reported that in 2023, Country Garden’s sales declined by almost 50 per cent year on year, leading to a lack of liquid cash. Presently, the company has a time period of about a month; post that, it would have to file for bankruptcy.
Impact of Evergrande’s downfall on Chinese economy
The real estate sector in China has played an important role in driving the economy of the country and has accounted for 30 per cent of the country’s GDP. However, in the wake of the collapse of Evergrande, other major real estate developers such as Kasia, Fantasia, and Shimao Group too have defaulted on their debts. Also, the country’s real estate sector is facing the wrath of the overall economic slowdown under which China is reeling.
Decline in China’s exports
China’s exports fell by 14.5 per cent in July on year on year, while imports fell by 12.4 per cent last month. This has been one of the fastest declines in Chinese exports since February 2020.
Weak exports, caused by falling global demand, have increased the pressure on Beijing to boost domestic consumption for the rest of the year. Also, Foreign Institutional Investors are selling their holdings in China, and there is a dip in investment.
Households are reeling under severe debt, and household consumption makes up just 40 per cent of China’s GDP.
Rise in unemployment in China
China is known to hide information so as to avoid criticism at home and abroad. In August, the National Bureau of Statistics of China stopped releasing data on youth unemployment. Moreover, the June data was alarming as unemployment amongst 16-24-year-olds touched 21.3 per cent, and it is double of what it was four years ago. However, the situation is far worse than these figures denote, for in China, a person is considered gainfully employed even if they work only one hour per week! Nor does this figure include young people in rural areas. Some believe China’s actual youth unemployment rate could be as high as 50 per cent.
Chinese Yuan weakens, stock market hits nine-month low
According to the China Foreign Exchange Trade System (CFETS), the yuan’s strength relative to a basket of currencies decreased 0.28 points from the previous week to 97.19. The index compares the yuan’s value with the value of 24 currencies, including the U.S. dollar, the euro, and the Japanese yen.
Last week also saw the index measuring the yuan against the Bank for International Settlements currency basket edge down 0.14 points from the previous week to 101.63.
The index measuring the yuan against the Special Drawing Rights basket fell 0.41 points week on week to 92.08.
The impact of the decline in the value of the Chinese yuan has been felt by the country’s stock market as it has declined to a nine-month low. Efforts were made by the Chinese government to introduce the rate cuts. Charu Chanana, market strategist at Saxo in Singapore stated that the rate cuts would merely put extra pressure on the banks and in order to revive the sentiments of the stock market, steps need to be taken to address broader issues such as those related to capital adequacy and solvency.
Foreign investment in China hits 25 years low
According to the recent figures released by the State Administration of Foreign Exchange, direct investment liabilities, which gauge the foreign direct investment in China, fell to $4.9 billion during April- June period. This was 87 per cent down from the same period last year, and it was the smallest amount in any quarter in data back to 1998.
Decline in China’s fertility rate is a worrying factor
In 2022, the fertility rate dropped to a record low of 1.09, whereas a rate of 2.1 is needed to sustain a population. Currently, China’s fertility rate is among the world’s lowest, alongside the likes of Hong Kong, Singapore, South Korea and Taiwan. In the last six decades, China’s population dropped for the first time, and this year, India surpassed China to become the world’s most populous nation.
As China’s population rapidly ages it will have a drastic impact on China’s future economic growth. China’s old-age dependency ratio (the ratio of people aged 65+ to those aged 15-64) is likely to touch nearly 52 per cent by mid-century. This indicates that, for every two working-age individuals, there will be one person aged 65+. By the 2080s, this figure could climb to almost 90 per cent.
The number of retirees will increase manifold, reducing China’s workforce and putting pressure on the country’s social safety net and healthcare. According to the US-based Centre for Strategic and International Studies: “After peaking at over 1.42 billion in 2021, current forecasts project that China’s population will shrink by over 100 million people by 2050. By the end of the century, China’s population may dwindle to less than 800 million, with more dire scenarios putting the figure at less than 500 million.”
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