Is the Chinese economic model broken?

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China is now in dire need of a new engine of growth.

China is much more dependent on real estate as an engine of economic growth than anywhere else in the world.

President Xi sees housing policy as central to his common quest for prosperity.

Many people see green technology as a potential savior.

The collapse of Evergrande, the world’s most indebted real estate company, has unfolded in dramatic fashion, and it could signal a huge shift in how the Chinese economy works. Clearly, the economic model that drove China’s growth above the world for the past two decades or more is running out of steam. What follows now is uncertain, but it could lead to considerably lower economic growth for the world’s second-largest economy.

This is important for the whole world as China has been the main contributor to global growth over the past decades. In the five years leading up to 2018, China accounted for up to a third of global growth. The problem, however, is that real estate has been the engine of China’s growth for too long, and for too long, and it can’t go on forever. China is now in dire need of a new engine of growth.

This footage shows 15 apartment buildings recently demolished in the southwestern city of Kunming, as these buildings have been idle in recent years. Such things are not uncommon in China, as the country is now home to one of the largest numbers of unoccupied apartments in the world.

During my recent trip to the eastern city of Jinan, I discovered that the city is dotted with empty apartments and empty buildings. Many buyers were forced to move into these half-built apartments because local developers were too strapped for cash to complete these complexes.

This graph shows the extent of the problem compared to other countries. China is much more dependent on real estate as an engine of economic growth than anywhere else in the world. Spain is the only place that came close in 2008, and that bubble burst dramatically.

So Sun Yu, we have had this overloaded Chinese real estate market situation for a long time. Why are people worried about it now?

The reason people are so worried this time is that President Xi Jinping is in power in China this time around. And he said “housing is for living, not for speculating.” And President Xi sees housing policy as central to his common quest for prosperity.

The affordability of housing in China is currently one of the worst in the world. At the end of last year, it would take an average of 25 years of household income in a south-central Shenzhen to buy an apartment. In contrast, the figure is around 13 in London and 8 in New York.

Apparently, President Xi couldn’t tolerate this, and he wants things to change. And the solution is what’s called the “three red lines,” which are three financial ratios, mainly debt ratios, that Chinese real estate developers must follow to gain access to credit. The policy, which was launched last August, has had a huge impact on the industry as many developers, led by Evergrande, are in dire financial straits for failing to meet these requirements.

So James, if China’s real estate-based growth model falters, what will China’s next growth driver be?

So the question of what kind of growth engine can emerge in China to take over from the failing real estate sector is really the $ 64 million question for the future. And I think a lot of people see green technology as a potential savior.

China’s record in this area is truly remarkable. China has installed more solar power, more wind power than any other country in the world. And in the case of wind power, the amount of wind farm capacity that was added last year was more than the rest of the world combined.

Moreover, in electric vehicles, it is quite astonishing what Chinese companies are doing. So far, more than 40% of all electric vehicles sold in the world have been sold in China.

You can really tell the Chinese government is behind this. One of the biggest numbers from China over the past month was an estimate by Zhang Xiaohui, dean of the School of Finance at Tsinghua University, who said China would need by 2060 of approximately $ 46.6 billion to support its carbon neutrality campaign. .

To put that number into perspective, this means that each year by 2060, China will invest $ 1.2 billion. This equates to the size of the entire Indonesian economy.

So there is no doubt that China is really serious about this. It’s just too early to say, I think, whether or not this area of ​​green technology will be big enough and attract enough investment to really offset the decline in the real estate industry.

Despite the enormous potential of the Green Revolution, China still relies heavily on fossil fuels to fuel its economic growth. Coal-fired power plants currently account for over 2/3 of China’s energy consumption.

Unfortunately, the authority has largely underestimated the situation. In the first eight months of this year, China’s coal production only increased by 4% thanks to the closure of hundreds of coal mines across the country. At the same time, energy-consuming countries grew by 15%, largely thanks to the post-pandemic global economic recovery that boosted Chinese exports by more than 35% during the same period. Thus, this combination suggests that China still has a long way to go in transitioning from an economy driven by the traditional real estate economy to one more fueled by renewables and other more sustainable models.


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