More semiconductors, less housing: China’s new economic plan

More semiconductors, less housing: China’s new economic plan

China’s political leaders, under pressure to support the country’s fragile recovery, are slowly putting the economy on a new course. They can no longer rely on real estate and local debt to drive growth, but are instead investing more in manufacturing and increasing central government borrowing.

For the first time since 2005, when comparable records began to be kept in China, state-controlled banks have begun a sustained reduction in property lending, data released last week showed. Instead, huge sums of money are being funneled to manufacturers, particularly in fast-growing industries like electric cars and semiconductors.

There are risks to the approach. China is chronically oversupplied with factories, far more than it needs for its domestic market. A greater emphasis on manufacturing will likely lead to more exports, an increase that could antagonize China’s trading partners. China’s additional borrowing also poses a challenge to the West, which is trying to encourage additional investment in some of the same industries through laws like the Biden administration’s Inflation Reduction Act.

The shift toward manufacturing loans underscores Beijing’s reluctance to bail out China’s indebted real estate market. Construction and housing account for around a quarter of the economy and are now suffering sharp declines in prices, sales and investment.

China’s investment push could drive stronger growth in the coming months, partly offsetting problems in the real estate sector. But increased central government borrowing, as a replacement for local borrowing, will do little to alleviate the long-term drag on growth caused by debt accumulation.

“I don’t think there is a problem for short-term development, but we have to worry about medium- and long-term development,” Ding Shuang, chief China economist at Standard Chartered, said at a recent forum of Chinese representatives. economists and finance experts in Guangzhou. “It’s fair to say that real estate is not in a flat.”

China’s housing crisis has its roots in four decades of debt-fueled speculation that drove prices to levels far above what could normally be justified by rents or household incomes. Chinese authorities triggered the sector’s recent downturn by starting to curb lending several years ago, and are now reluctant to rescue the sector by launching another wave of home loans.

The government believed China’s economy would recover in 2023 after the country’s leaders lifted most of the “zero Covid” restrictions that crippled the economy last year. But after an initial burst of activity, growth slowed in the spring and summer. Vulnerabilities remain: Manufacturing activity stumbled again last month, after showing growth in August and September.

Last week, at a conference chaired by Xi Jinping, China’s top leader, Communist Party and government officials met privately to discuss financial policy. According to a later official statement, the conference mandated that more financial resources be channeled to advanced manufacturing industries, as well as assistance to local governments.

As the housing market struggles, factory construction fueled by government-backed financing is proceeding at full speed.

China has already built enough solar panel factories to meet the needs of the entire world. It has built enough car factories to make all the cars sold in China, Europe and the United States. And by the end of 2024, China will have built as many petrochemical factories in just five years as all those currently operating in Europe, plus Japan and South Korea.

Economists at the recent meeting in Guangzhou, held by the International Finance Forum, a Chinese think tank, acknowledged that the country faced challenges not faced since the years immediately after Mao’s death in 1976. But they predicted that Large investments in new manufacturing technologies would pay off. off.

“Today we have difficulties comparable to those of 1978, so the question now is what will be the future of innovation-driven growth?” said Zhang Yansheng, a former senior official at the central government’s economic planning agency who now works at the China Center for International Economic Exchanges.

The Chinese banking system’s shift from real estate lending to manufacturing began several years ago, Bert Hofman, director of the East Asia Institute at the National University of Singapore, said at the Guangzhou event.

Before the pandemic, Chinese banks were increasing their real estate lending by more than $700 billion a year. In the 12 months to September, total outstanding real estate loans decreased slightly. Banks lent less to developers and households paid off old mortgages and took out fewer new mortgages.

By comparison, net loans to industrial companies soared from $63 billion in the first nine months of 2019 to $680 billion in the first nine months of this year. That money has gone in part toward building a semiconductor industry that could allow China to free itself from imports and bypass U.S. export controls, as well as into categories such as electric car manufacturing and shipbuilding.

Many economists have expressed concern that pouring more money into the manufacturing sector might not fix the overall economy. The real estate sector is still declining and is so large that it will not be easy to offset its problems with the growth of industries such as automobile manufacturing, which accounts for 6 to 7 percent of economic output.

Wasteful factory construction threatens to antagonize other countries: Much of the extra production is likely to be exported because many Chinese households have cut back on spending.

But the United States and the European Union have become less willing to accept further increases in their trade deficits with China. The European Union is already investigating the use of government subsidies by China’s electric vehicle industry, opening a new trade gap between Brussels and Beijing.

Aware of these risks, China is courting developing countries. These countries still have sizable but often aging manufacturing sectors that provide an opportunity for exports from newly built, highly efficient factories in China. Many developing countries are struggling to renegotiate large debts to Beijing for infrastructure projects, putting them in a weak position to raise tariffs on Chinese goods.

Chinese factories have been gaining dominance for decades. The country’s share of the global manufacturing industry has grown almost fivefold, to 31 percent, since 2000, according to data from the United Nations Industrial Development Organization. The United States’ share has fallen to 16 percent, while the share of developing countries excluding China has remained at 19 percent.

Of course, one thing is not changing in China’s approach: its reliance on debt to drive growth.

Officials have tried repeatedly for years to control their addiction to debt. Liu He, vice premier, promised in a speech in 2018 that this would happen within three years.

Instead, local government debt has risen since 2020, reaching nearly $8 trillion last year, and semi-independent local government borrowing units have racked up trillions more dollars in loans. China’s overall debt has ballooned to be considerably higher, relative to the country’s economic output, than the debt of the United States and many other developed countries.

Yao Yang, director of the National School of Development at Peking University, said in September that debt control efforts had not been successful.

“Between 2014 and 2018, which should have been a window to deactivate the debt, the debt skyrocketed; the situation worsened after 2020,” he said in a speech. “This indicates that previous debt relief measures were ineffective and, in some cases, counterproductive.”

Siyi Zhao contributed to the research.

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John C. Johnson

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