China’s property crash is becoming more dangerous by the day

China is in imminent danger of experiencing a severe crisis within its financial system. If immediate and drastic measures are not taken to hinder the spread of troubles in the informal banking sector and stop the decline in demand, China runs the risk of falling into a familiar situation where the traditional methods of boosting the economy become ineffective.

Cai Fang, a member of the central bank who sets interest rates, has proposed injecting a substantial amount of money, around $550bn, directly into the economy to prevent a negative economic mindset from spreading as households become more cautious with their spending. This approach is similar to the concept of helicopter money, where a significant amount of money is injected into the economy to boost its performance. The goal here is to counteract the potential deflationary effects and encourage households to continue spending.

"The top priority at the moment is to invigorate consumer expenditure. It is essential to employ all appropriate, lawful, and economically feasible means to inject funds into individuals' wallets," he stated on China Finance 40, the esteemed platform for expressing viewpoints.

It seems as if the US Treasury is currently experiencing a critical turning point, similar to the one they encountered in 2008 when Lehman Brothers failed, or like the eurozone faced in 2012 when there was a risk of Italy and Spain falling into an endless cycle of despair.

America and Europe took prompt action following a series of mistakes.

The fact that Xi Jinping has acknowledged the destructive forces operating in China is questionable, and it is uncertain whether economists in the Western world are aware of the potential risks that could be spread globally, beginning with a sudden change in exchange rates.

The Chinese currency, yuan, has plummeted to its lowest value against the US dollar in sixteen years. As a result, the entire region of East Asia is experiencing a decline in their respective currencies, leading to the euro's trade-weighted index reaching an all-time high.

The impact is to severely harm a eurozone economy that is already experiencing a severe decline in industrial activity. The more devalued the yuan becomes, the larger the wave of Chinese electric vehicles, machinery, or wind turbines being sent to Europe.

People from the Western countries came out of the pandemic with a surplus of savings, which can be attributed to the implementation of furlough programs.

For a span of three years, the people of China faced severe and strict restrictions in their daily lives, without much assistance. The consequences of these measures have greatly affected the economic stability of countless small businesses run by families. As a result, a significant portion of the population has drastically cut down on their expenses to restore their dwindling savings.

This is precisely why the rapid recovery after the pandemic has already lost momentum and why the economy has plunged into deflation.

The underlying cause is the agonizing unraveling of the massive Communist debt bubble, which surprisingly resembles the debt troubles experienced by the late Qing dynasty.

The enormous builder Country Garden, carrying a total debt of $200bn, is on the brink of a financial crisis as it has failed to make payments on its US dollar loans given out in Hong Kong.

According to Ting Lu and Jing Wang of Nomura, the company has already been paid for a million properties that are still in the development phase.

Similar to other developers who are dependent on China's "pre-sale" approach, its financial stability relies on a continuous influx of new purchasers to settle previous obligations.

The number of buyers has significantly decreased. According to the CRIC Research Centre, sales made by the top-100 developers in July this year were only 30% compared to what they were three years ago.

They stated that they hold the belief that the Chinese economy is on the verge of a rapid decline with even more severe consequences still ahead. They cautioned that the ineffective measures taken by the government thus far will not be sufficient to prevent a domino effect of defaults and repercussions throughout the economy.

According to us, Beijing should take on the responsibility of being the ultimate source of financial assistance for struggling big developers and financial institutions. Additionally, Beijing should also take on the responsibility of being the ultimate spender to stimulate overall demand.

China's colossal property sector, valued at a staggering $60 trillion, reigns as the most extensive asset category globally.

It makes up 50% of the total global property sales, a remarkable statistic considering that China's labor force is already decreasing and there is no longer movement of people from rural areas to cities.

The developers owe a massive amount of money, totaling $5 trillion. To put it into perspective, this is six times larger than the $800 billion subprime property debt that the United States had before the Lehman crisis.

They heavily depend on the $3 trillion portion of the shadow banking network referred to as the "trust" sector, which lacks a lender available for emergency situations. These trusts are beginning to experience significant problems. The most troubling victim thus far has been the Zhongzhi Empire, which amounts to $140 billion.

The real estate bubble serves as a fraudulent investment that sustains the financial stability of China's regional governments.

They depend on real estate for 38 percent of their overall earnings, predominantly derived from the selling of land. However, these sales have plummeted. The Ministry of Finance states that revenue from local governments has declined by 21 percent during the initial six months of 2023.

This could result in a significant financial crunch unless Beijing intervenes with a massive stimulus plan. The indications suggest that Xi Jinping is still unwilling to take this step.

His partners have released a press release titled "Addressing the Eight Misunderstandings about Boosting National Consumption".

Xi is confronted with a challenging dilemma. Continuously attributing success to the distorted Chinese economy whenever its progress diminishes and the economy decelerates has contributed to this enormous predicament. However, taking decisive action entails the possibility of an economic downturn and a loss of credibility for the ruling Communist Party.

He instinctively tries to hide the unfavorable numbers. Figures on unemployment among young people have been temporarily put on hold following a significant increase to an all-time high of 21%.

According to a professor from Beijing, the percentage is closer to 46% when accounting for individuals who are "lying flat", a term used in China to describe dropping out and living at home, relying on grandparents (four per child) to spend their days idly hanging out with friends at coffee shops.

The initial error made by the Party was disregarding previous alerts from premier Li Keqiang ten years ago regarding the potential downfall of China into the middle income trap in case it persisted with a catch-up strategy of government-directed development for an extended period of time.

The second blunder was initiating a political crackdown on business leaders and abandoning the economic principles of Deng Xiaoping that have been driving China's resurgence.

The third approach was to return to economic Leninism, believing that the financial crisis in 2008 exposed the flaws of US-driven capitalism and proved the importance of Party supervision over credit.

The fourth strategy involved provoking a conflict with the progressive Western nations prior to China achieving a comparable level of economic strength.

The proof is clear. The rate of growth for overall productivity has declined to the same levels seen in developed economies prior to China reaching maturity.

The nation is not following the same path as Japan, Taiwan, and Korea did during a similar stage of progress any longer. The final blow is a significant decline of 87 percent in foreign direct investment in the previous quarter, marking the lowest level ever recorded since the 1990s. This decline can be attributed to the leadership of Xi.

According to Capital Economics, China's actual rate of economic growth is expected to decrease to 2.8 percent by the end of the 2020s. If this prediction becomes a reality, China will not be able to surpass the United States in terms of economic prowess during this current decade. Additionally, China will further decline in comparison to the US as its population begins to age and decrease in numbers.

China strongly rejects the notion of falling into the phenomenon of 'Japanification'.

In my perspective, it would be fortunate to achieve a similar level of success as Japan. It faces similar issues of fluctuating economy and a diminishing workforce, but its situation is worsened by authoritarian rulers who have a strong aversion towards embracing a free market system.

In contrast to Japan, the Western nations are not pleased and they are now faced with the challenge of carrying out strategic reshoring while dealing with a technological blockade.

Joe Biden refers to the Chinese economy as a "time bomb that could explode at any moment".

In my opinion, I believe that Xi Jinping will prevent a major crisis from happening under his leadership. Eventually, he will make a quick decision and implement extreme measures to stabilize the real estate market and address issues with unofficial financial institutions. This will postpone the inevitable day of facing the consequences for another period of time.

If he fails to do so, the worldwide financial system will face a perilous outcome this winter.