Front Burner - China's boom changed the world. Now, it faces a slump

Episode Date: September 6, 2023

As Canada deals with high inflation and a housing shortage, the world’s second-largest economy is grappling with a nearly opposite reality. China has been booming for over 40 years as Beijing invested heavily to build up the country. But now, demand for housing is sinking amid overbuilding and developers mired in debt, and consumer prices have recently fallen into deflation. Today, Wall Street Journal China bureau chief Jonathan Cheng explains the signs that China’s economy is slowing down, and what it could mean for the boom that changed the world to come to an end. Looking for a transcript of the show? They’re available here daily: https://www.cbc.ca/radio/frontburner/transcripts

Happy Holidays! I'm Frank Cappadocia, Dean of Continuous Professional Learning at Humber Polytechnic. I'd like you to set a goal to drive key learning for your people in 2025. I want you to connect with Humber CPL to design a custom training solution that accelerates your team's performance and engagement. Humber works with you to hone industry-specific upskilling, enhance your leadership, and drive results. Flexible learning delivery formats are tailored to your unique needs. Adapt, evolve, and excel. To learn more, go to humber.ca slash cpl. This is a CBC Podcast. Hi, I'm Tamara Kandaker. So here in Canada, as we've been so consumed by talk of inflation and a housing shortage,

it's surreal to think that in China right now, people are living almost the opposite reality. China appears to be sliding into deflation. People and businesses are not spending, and the world's second largest economy is struggling to revive demand. For the past two years, China has been mired in this now historic property slowdown and the slump is just deepening. Like Canada, a lot of ordinary people in China have their money tied up in housing.

In fact, about one quarter of China's economic activity comes from real estate. But now, after years of overbuilding fueled by billions in debt, some of the biggest developers are struggling to survive. And the uncertainty is causing all sorts of problems across this globally important economy. So to explain how we got here, Jonathan Chang is back on the show. He's the Wall Street Journal's China bureau chief in Beijing, and he's Canadian. He's going to walk me through the signs that China's decades of explosive growth is slowing down, how Beijing's politics could factor in, and what China's stagnation could mean for countries like Canada. Hi, Jonathan. Thanks so much for being here.

Thanks for having me. Thanks for having me. So one of the reasons China's slowdown is so striking is that for the last 40 years, the country's gone through this period of incredible growth. And I was hoping we could start by laying that out for people. So since China went from being pretty isolated to opening up its economy to the world in the late 70s, Tell me about what that growth has looked like and how big has that explosion been? Yeah, you know, it's impossible to overstate just what a big transformation we saw there. I mean, back in the 60s and up until the late 70s, China was basically

like what we might think of North Korea like today. It was isolated from the world. It was primarily agrarian. Politics kind of ruled the day. And then the 1970s, towards the end, we saw Deng Xiaoping come along and really unleash a lot of these forces and its sheer population. And you just think about how quickly its economy went from being effectively a third world country, and now it's the world's second largest economy. Deng Xiaoping radically shifted China's economy. Its four-decade-long economic boom was built on embracing capitalism and encouraging private business, in stark contrast to the poorly managed state-run enterprises led by Mao. As multinational companies flocked to China,

it quickly became the world's manufacturing hub. It's potentially on path to overtake the US, although now people aren't so sure about that anymore. But of course, the whole world has felt the rise of China. Right. So as China's economy has grown, it's become really important to other economies like ours in Canada. Yeah, because, you know, China went on a big building boom. And in order to do that,

it needed to buy up a lot of natural resources, it needed a lot of steel, it needed a lot of agricultural products, it needed a lot of timber, it needed a lot of stuff. And Canada, Australia, you know, countries that are rich in natural resources really benefited from that. You know, I think it's a big part of the reason why Canada's economy is as strong, you know, as it has been over the last few decades. So China has for a long time been seen as this new kind of engine of the world. But in recent months, we've been hearing about signs that this explosion is slowing down. And so let's get into some of those signs. One of the ways that China has fueled its growth has been by investing in itself and building up the country. China's

been pouring a lot of money into making things like roads and bridges and skyscrapers. But more recently, it seemed like they may have taken things too far and overbuilt. And tell me what that has looked like. Yeah, you know, I mean, China genuinely needed a lot of infrastructure when it started to make its way into the global community of nations. And so it built a lot of roads, a lot of highways, a lot of high speed rail, a lot of cities, a lot of bridges, airports, all this sort of infrastructure that genuinely was needed. But it became almost something like an addiction. It became something that officials knew worked. And so why fix it if it isn't broken, right? And I think that mentality carried on actually long past the point where it was broken, where you had airports being built that hardly get used at all. There might be one or two flights a day. You can keep building airports and you'll get economic growth, but it's no longer going to be adding to productivity. It's no longer going to be put to much use. In fact, the maintenance of it is going to end up eating up a lot of resources

that should otherwise be going to more productive purposes, right? So you have that sort of thing happening. And, you know, on an individual level, you had a lot of households who are pouring all of their money, their nest eggs, basically into property, because, you know, we've seen it all over Asia, in Hong Kong, or in Japan, or in Korea, even in Canada, the US, other places where if you just bought a home, you just watched it gain in value and it didn't seem to stop. So that was sort of the mentality that a lot of people had. And so people were buying up second homes, third homes, fourth homes, they weren't needing these homes. They were sitting empty. They were just a store of value. And the problem is that a lot of the Chinese economy became reliant on that sort of growth.

But at a certain point, it becomes a little bit ludicrous and unnecessary. Right. And I'm wondering, in cities in China, can you talk about, like, what kinds of things you would see that are evidence of this overbuilding problem? Yeah, I mean, I'm in Beijing, and you don't need to go too far. I mean, Tianjin is not too far away. It's only half an hour away by high speed rail. But there you'll see a lot of overbuilding, you'll see a lot of tall towers, some completed, some uncompleted, you'll wonder

what's inside. And the answer is not a whole lot. It was built because it made sense when it was being built, perhaps. But now it sort of sits there. And so we did a story recently that talked about some of the spectacular bridges that have been built in one of the poorest provinces of China. But these roads are not being used. I mean, they're spectacular bridges across these gorges and across these mountains, and they link communities that have never been linked before. But there's no money here, and no one's really using these roads. So you can see a lot of this stuff, but it's not additive in the right way for the economy. So you mentioned how a lot of wealth, including a lot of ordinary people's monies, become tied up in real estate.

And for decades, that sector was booming. But recently, things have been pretty dire. And the big story that everyone's been talking about is Evergrande, which used to be China's biggest developer. Chinese developer Evergrande has filed for bankruptcy protection in a U.S. court. The property giant made the move in one of the world's biggest debt restructuring exercises. Evergrande was once China's top-selling developer, but is now the world's most indebted property company. It lost over $80 billion U.S. in 2021 and 2022. And what triggered that drop?

Well, so it's hard to know where to start. There's a lot going on here. But relatively early on in the pandemic, the government here in China was actually pretty savvy, you could say, in recognizing that this property bubble can't keep going up forever. If prices only go one way, then people won't be able to get into the housing market. Those who are in it will do great. But it was starting to discourage household formation. People were not getting married. People were not having kids because they just knew that they couldn't afford a house to live in. And so the government started to impose limits on property developers. Evergrande was known as what we've called in our reporting, the bad boy of property developers. These were the guys who borrowed a ton of money, built tons of apartments, sold them as quickly as they could, and were just highly levered.

If there was ever a downturn, these guys were going to be in real trouble. So what the government did was they started to rein in the limits that developers could take on in terms of debt. And Evergrande, sure enough, was the first to really start to feel the pain. They started building apartments and they stopped. They couldn't finish building them because they couldn't get the debt to finish them. And that led to a crisis of confidence really across the home buying market. People didn't want to touch Evergrande anymore because they weren't sure that if they bought an apartment from them that they'd get a finished product. Yeah, right. And then last week, another developer, Country Garden, also reported an over $7 billion loss for the first half of the year, but then it got an extension to repay some of its

almost $200 billion in debt. And so did Country Garden go through something similar or are its issues different from Evergrande's? Well, Country Garden's profile is very different from Evergrande. Both of them are from Guangdong province, which is in the far south, close to Hong Kong. But Country Garden's reputation is really being very conservative. They were very big like Evergrande, but they were more measured. They were the professionals. They were the ones who knew what they were doing. And so in some ways, it's scarier to see them on the brink. And in fact, they came very close to default this week. Reuters source says the troubled Chinese developer has made payments on two dollar bonds

just in time. Country Garden had failed to make the scheduled payments early last month, but had a 30-day grace period that was due to expire Tuesday. And in this case, Country Garden is sort of suffering from the ripple effects from everything I just described with the government limits on debt that property developers could take on, and then Evergrande's woes, because the confidence has not come back. China, as I think most listeners know, was basically on lockdown for three years of COVID. And that really put a dent in people's ability to buy apartments, to look at apartments, but also in their confidence and their willingness. Many people, of course, lost incomes, lost a sense of security, and lost confidence that the

property market was the place to stash your cash. And so coming out of COVID, there were hopes that people would come back to the housing market, but that confidence is just not back. And confidence is something that you can't mandate, even if you're the Chinese government. Yeah. What has it done to the average person's willingness to spend money? Well, it's a psychological effect that's hard to quantify. You know, it's the wealth effect. And if you feel like all of your hard-earned savings over the course of decades, your entire household,

maybe through two generations, maybe three generations, if you feel like that was once worth a million dollars, your apartment, but now maybe it's worth 800,000, maybe it's worth 700,000. That's going to impact the way that you think about spending, it's going to impact the way you think about buying a car or taking a vacation. And, you know, the other thing that I think many Canadians may not be aware of is that the social safety net here in China is relatively underdeveloped. So people have to save a lot of money for their retirement. They need to save a lot more money

than most people in the West otherwise would for a rainy day, for health emergencies, for children's education, for retirement, all of these sorts of things. And so you just have people get more conservative. They get concerned about running out of money. And so they don't splurge as much, and that has a lot of ripple effects. Happy holidays. I'm Frank Cappadocia, Dean of Continuous Professional Learning at Humber Polytechnic.

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Another sign of economic trouble that experts have been pointing to is China's youth unemployment rate, which has been surging. And I've also seen a few stories recently about young Chinese people getting paid by their parents to be quote-unquote full-time children, so to sort of help them out with various things at home, because it's gotten so hard to find actual work. The term full-time children has gone viral on Chinese social media. Videos show young people spending time with their parents, cooking and cleaning in exchange for a salary. And why are there so many young people unemployed right now? It's a great question. And of course, the thing to point out first is that the youth unemployment rate as calculated by the Chinese government was marching higher and higher for something like six months in a row. And just a few weeks ago, they declared

that they're going to stop reporting that number. And obviously, that raises a lot of eyebrows, because if the numbers were great, very low meaning, you'd keep reporting them. But the fact that you now have more than 21.3% of people who are between age 16 and 24 out of work is a pretty worrying phenomenon. And the reasons why are many. One is that the government has cracked down on many of the industries that were the biggest employers of young people, not only real estate, but also the tech sector, also private education, tutoring, and these sorts of things. These were massive employers for young people. And each one of those three sectors has taken a regulatory hit. That's one reason. Another is that, you know, you have a lot of university educated young people who come out into the workforce and don't want to work in a factory anymore. If you think about the classic rise of China, a lot of that was done on the factory floor. But

kids now, as in other parts of the world, I don't know how many Canadian kids come out of university and want to go work in a factory, right? So that's the sort of situation you have in China, where you have people who, if they were going to starve, they would probably do whatever job they could get. But in many cases, as you mentioned, that I've seen those stories do with people being full time kids. And it's, I don't know if it's a real widespread phenomenon, but it's a really good and funny and memorable sort of picture into the state of youth in China these days, which is that they do have their parents to fall back on. They're not going to starve on the streets per se, but neither are they going to develop their

skills, neither are they going to be building a career, building wealth. They're going to be kind of sponging off their parents, and that doesn't bode well for China's future. Yeah, I've heard the term lying flat come up a lot, basically opting out of traditional work and family values because people are sick of the pressure and competition. A record number of young people in China graduated from college this year. But instead of celebrating, some are marking the milestone on social media by lying down flat on the ground in their graduation gowns, looking dejected and exhausted. Does that refer to this refusal to work in factories? Or is it a broader phenomenon than that, you think? Well, yeah, I mean, there have been all these quite telling catchphrases

that have really captured the imagination of a lot of young people in China. Lying flat, I think, is the most prominent of them all. And it sort of says, I don't want any part of this rat race. China's gotten too competitive. There are too many people chasing too few jobs. I'm just going to do something that makes me happy. It's going to be minimally, you know, keeping me afloat, but that's okay, because I'm going to enjoy myself. That's one of the catchphrases. The other ones are, you know, involution. It's a very technical term, but it basically means joining the rat race, even if the involution. It's a very technical term, but it basically means joining the rat race, even if the rat race, if the wheel just keeps spinning, the hamster wheel keeps spinning faster and faster, all you can do is keep up with it. And then you have people who

are trying to get out of the country. And that's another slang phrase called run, which is a play on the English word, R-U-N, run to get out of the country. And so you have many Chinese people looking for a way out. And then finally, you have some people who would go even further than lying flat. There's another phrase that people use a lot these days called let it rot, bai lan. And that basically is just, it's almost nihilistic. It's to say, not only am I not gonna participate

in the rat race, I'm just gonna indulge in what I wanna do, tomorrow be damned. It sounds like China's old model for growth is slowing down in the face of overbuilding and debt and changing demographics. And now that we've talked a bit about how we got here, let's talk a bit about solutions. So how have experts and economists suggested that China could transform its economy again to keep growing? Well, I think part of the solution that a lot of economists will give you is they'll say that infrastructure, construction, real estate, that was what got China to where it is, but it's

not going to get China to the next rung up the ladder. They're going to need to look more like a Western style economy. They're going to need to look more like Canada, where consumption is a bigger part of the economy, where people are not sitting on a lot of cash or stashing it all in property because they do have a social safety net, because they do have confidence and because they want to buy things. And, you know, there's a little bit of an ideological component to this that I don't think sits well in Beijing. I don't know that they want to encourage materialism, consumerism, because China is still a socialist country. It's in the Constitution. That's what they're all about. And so that's part of the problem. But also, they don't have that social safety net. People don't feel confident spending. And so I don't know whether it's a matter of willingness or ability, but either way, we haven't really seen China make that transition as many economists say that they should. But that's that is the way that most experts would say China needs to tweak things.

Yeah. And so what's your sense of whether these are solutions that Xi Jinping and the Communist Party would be open to? And how have they responded to this moment so far? Well, they've responded with measures that kind of put band-aids on wounds. But I think what most economists would say is that they're not getting ahead of the problem. They're reactive. And they haven't done the big stimulus that everyone has expected and come to expect from China. We saw during the 2008-2009 financial crisis that China pulled out the proverbial bazooka and went big with stimulus. It will build schools and subways, power plants and hospitals. That creates jobs for laborers laid off when factories closed as exports to the U.S. fell.

And that helped pull not only China but the whole world out of that crisis. They haven't done anything remotely like that this time around. And partly it could just be that they're comfortable with a slowdown. They're comfortable with growth cooling. Or it could just be that they don't have solutions. And it's hard to know because China isn't the most transparent government. That's an understatement. And they don't always share with us. We don't get to see the debates happening within government like we do in

Canada or the US. So to wrap up here, Jonathan, we talked earlier about how tied China's economy is to other parts of the world. And so let's say the economy does slow down and stagnate. What could that mean for the rest of the world and economies like Canada's? Well, you know, I don't have a crystal ball, but I can say that it will not be positive. It certainly won't be felt the most by Canada. The worst of it will still be felt within China. But the world is connected. It's very closely connected.

People make comparisons between the Cold War and what they're calling the Second Cold War now. But as everyone points out, China is so much more interconnected with the rest of the world and with the economy than the USSR ever was. And beyond that, it's the people-to-people ties. Obviously, Canada has a lot of people with Chinese roots, and there are many Canadians here in China trying to do business. In fact, you know, Tim Hortons is trying to grow real fast here. They're going to feel it. But more than that, it is the natural resources. It's all of the things that Canada is hoping to sell to the world's second largest economy.

And many industries in Canada had grown reliant on this big customer. And when this big customer is no longer spending as much, that's going to hurt people back home. And that could mean layoffs, that could mean a slowdown in the economy, and that could mean consequences for everyone. Okay, Jonathan, thank you so much for walking us through this. I really appreciate it.

It was a pleasure. All right, that's all for today. I'm Tamara Kendacker. Thank you so much for listening, and I will talk to you tomorrow. For more CBC Podcasts, go to cbc.ca slash podcasts.