Front Burner - Is China’s economic miracle going bust?

Episode Date: October 3, 2024

China’s economy has changed drastically in the last four decades. When China started to open up to the world in the late ‘70s and ‘80s, it went from one of the world’s poorest countries, to one of the world’s fastest growing major economies.But now, that same economy is struggling. Home prices are in freefall, retail sales are slowing down, unemployment is up. Things have gotten so rough that last week the Chinese government announced a set of stimulus measures that are meant to give the economy a big boost.Jonathan Cheng is the Wall Street Journal’s China bureau chief. He walks us through what these economic challenges mean for China, its citizens, and the global economy.For transcripts of Front Burner, please visit: https://www.cbc.ca/radio/frontburner/transcriptsTranscripts of each episode will be made available by the next workday.

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. This is a CBC Podcast. Hi, I'm Jamie Poisson. It's hard to overstate just how dramatically the Chinese economy has changed over the course of 40-something years. When China started to open up to the world in the late 70s and 80s, it went from one of the world's poorest countries to one of the world's fastest growing major economies. I'm talking an average of 10% GDP growth annually.

But now that same economy is struggling. Home prices are in free fall. Retail sales are slowing down. Unemployment is up. Things have gotten rough enough that last week the Chinese government announced a set of stimulus measures that are meant to give the economy a big boost. And on Tuesday, in a speech marking the 75th anniversary of the People's Republic of China, President Xi Jinping warned of, quote, rough seas, obstacles and difficulties ahead for the country. Jonathan Chang is back on the show to talk about why that is. He's the Wall Street Journal's China Bureau Chief, and we're going to talk about what this all means for China and the rest of the world too.

Jonathan, hi, thank you so much for coming on to the show. Always a pleasure to be here. So before we get into the why, I want to get a better sense of what this looks like on the ground. I mentioned off the top that unemployment is up, retail sales are down. Just tell me more about how people in China are being affected here. Yeah, I mean, I think in your intro there, you stated correctly that after something like 40 years of pretty phenomenal growth in China, things are, I think, for many people for the first time starting to feel a little bit more uncertain, a little bit more troubled. They're not sure what the future holds

anymore. They're not sure that things are going to be quite as hot as they used to be. You do have a lot of parents out there who have children, in many cases, one child, and they're getting a good education, but they're coming out of school and they're not finding jobs. It's very unique for China because of just how rapid the growth was for so many years, so many decades. And so people are holding back on spending money. They're saving more money. Most people's nest egg is in their apartments. Again, that's not totally different from how it is in many other parts of the world. But in China, you don't really have too many other alternatives.

You can't get your money out of the country very easily. The stock market's a bit of a casino. So people end up putting their money in properties, oftentimes two, three, four different real estate properties. Whilst back in 1979, virtually no one owned their home in China, now 80 to 90% of households own their homes, with more than 20% of households owning more than one home. All of them have been under a lot of pressure because the real estate market is one of the targets of regulatory pressure over the last few years. So you add that all up together and people are just feeling, I think a certain malaise is what is probably the best way to put

it. Can you tell me a little bit more about what's been happening in the housing market? about what's been happening in the housing market? Yeah, so about three years ago now, the Chinese government sort of came to a conclusion that it was no longer a good idea to have property prices keep going up forever, as it seemed to be the case for the couple of decades before that. You had an affordability crisis where,

you know, if you bought 30, 40 years ago, you were doing great. But if you wanted to buy now, it didn't make any sense. And if you had just come out of school and you wanted to get married and you wanted to build a family or something like that, it was just impossible. So the government came in and they started to really tighten up on the property market. They did this by targeting the property developers. up on the property market. They did this by targeting the property developers. And indeed, they've now gotten many of the biggest property developers to default and some to basically go bust and collapse. So mission accomplished, I guess you could say to a certain degree, but it's obviously also caused a lot of concern for a lot of ordinary people. I think a lot of

people thought maybe this thing would be over relatively quickly, maybe a year or two. But now we're in year three of this property crisis, and things don't look like they're really improving all that much. I know you took a reporting trip out to Shenyang City in northeast China earlier this year, and it's like this ghost town of mansions. And just can you tell me what you saw there? And yeah, just explain to me what that was like. Can you tell me what you saw there? And yeah, just explain to me what that was like. What I saw there is not something that is just confined to that area.

What I saw was just hundreds of homes. I guess we'd call them McMansions back in Canada or the States. You know, these big single-family homes, but they're pretty palatial, especially by Chinese standards. It's out in the suburbs of Shenyang, but not really that far out from the center of the city. So you can imagine how big this subdivision was. It was massive. I couldn't even have walked at all in a day probably. But I went there with the videographer and we sent the drone up into the sky. And when you send the drone up, you can see just how vast this property is and this abandoned property. So they built some of these homes. And most of them were almost finished.

They were these concrete shells. Some of them had furniture, chandeliers. They had moved in a couple of things. But they never finished it. And this wasn't a pandemic thing. This wasn't a real estate crackdown thing. This happened actually a little bit before that, but it's emblematic of what's happened all across China.

What I found there was perhaps a little more dramatic than some of the others because it was mostly built. It was pretty jarring, pretty striking to see all of this in person. And, you know, we highlighted this in the video, but after these homes had been abandoned, you had these farmers move in, and they were literally herding goats in this abandoned subdivision because there was so much space and shelter in these concrete sort of shells of homes that they could use to keep their livestock. Just if you could elaborate for me on how exactly it is that China got to this place, right, where you have all of these empty McMansions and also all of these young people. I think it's like almost 12 million, right, now graduating from university, entering into this really weak job market. You have all of this trepidation around spending. Just talk to me a little bit more about how we got here. Just talk to me a little bit more about how we got here.

Yeah, well, like in many other countries, you have a lot of people getting excited about moving up the ladder. This was a country of farmers, if you go back half a century. And many of them now want a piece of the middle class life. And the go-go years in China were in the 90s, were in the 2000s, when it really seemed like the sky was the limit. You could get a good education, you could certainly be much better educated than your parents were, you could get a white collar job, you could get an apartment, you could get two, you could get three, you could get four apartments. You could send your kids to schools in Canada or the UK or Australia or something like that. And so that was kind of the middle class dream. But the problem is that not everyone can enjoy that. It's still a country that is per capita quite poor, still somewhere around Mexico or Thailand.

It's sort of in that per capita belt there. It's sort of in that per capita belt there. And so, you know, I think China still does have a lot of these dreams. A lot of Chinese people have these dreams. And yet I think it's been quite difficult because growth has slowed. It was impossible. Nobody expected growth to grow at 10% forever. But it was still a shocking thing for most families to have to swallow to see growth come down to actually a pretty sort of ho-hum sort of level. One where if you send your kid to college and university, they're going to come out with a degree, but they may not come out with a

job. And so many of them are now effectively driving Ubers or working in, you know, doing a job that they didn't quite envision when they had come out. This year's job market has been difficult for newcomers, says Zhang Bo, who's 22 and just graduated from university. This is Karen's full-time job. Her parents are her bosses. Karen is among the nation's growing number of so-called full-time children. Meng Zhe has been looking for four months, and he isn't hopeful. I don't know how to answer that, he says, but I'll keep looking. I think when you add that all up, there is the sense of, wait a minute, I thought things were going to be a whole lot better. Would COVID have had an impact on the slowing growth? I think COVID's had an impact everywhere in the world.

And I think in China, perhaps some of the details are different. But I think COVID came along at a time when this was already taking place. It probably would have happened anyways. But I think when you combine the Donald Trump trade war that was really aimed at China in the years leading up to COVID. And then you add COVID itself, plus, you know, China's own management of COVID, where they really shut the country down and kept it locked away from the rest of the world for three full years. I think that really did a lot of damage to the economy. And then to come out

the other side of COVID and realize that the trajectory has slowed to this degree, I think was actually pretty scary for a lot of people. I understand there's a lot of anxiety over the birth rate. And could you just tell me more about that? Yeah, well, China, you know, for many years had the world's biggest population. And it had a-child policy that it enacted in 1980 and they kept it going until 2015. So you do the math on that, that's 35 years in which most families in China would be punished if they had a second child. It had its intended effect, it kept the population from exploding even more. But it also created a problem that we have today, which is that now nobody wants to have children. And so in the past, when the country was poor, people wanted to have more children. But I think it's

quite natural. And you see it in all the countries around the world, especially the ones around China. You look at Korea, you look at Japan, you look at Singapore, you look at, you know, Hong Kong, Taiwan, you look at these places, the birth rate has already fallen to below the replacement rate. So what that means is you have in the past, you had a lot of young people in China of working age and not that many, relatively speaking, that were in their retirement years that needed to be supported. Very quickly, you're looking at a scenario where you have a lot of seniors that need to be taken care of, and you actually have fewer working-age people, and that demographic profile is a very, very bad one. Starting next year, China will start to gradually raise its retirement age. to gradually raise its retirement age. The plan is to increase the numbers by up to five years by the year 2040.

60 to 63 for men, 55 to 58 for white-collar females, and 50 to 55 for blue-collar females. The decision comes as the country... I wonder if you could just put into context for me how badly the economy is doing vis-a-vis other countries. So I've seen that China's own forecast is that the country's GDP will grow 5% this year, which sounds like a lot compared to other countries. And so if you could just expand on that for me.

I think 5% sounds great if you're Canada. It doesn't sound so great if you're China. It does sound great, especially right now. Right. But I mean, keep in mind that, again, it was not that long ago that you saw double digit percentage growth. You don't want to start to plateau at this level. And 5% is not plateauing. But actually, prior to some of the actions the government has taken in the past week, it wasn't even given that China would hit 5% this year. And certainly, for the years ahead, you saw a lot of investment banks who do research on these sorts of things, they were projecting that China's economy might grow something like 4.1, 4.2, 4.3 next year.

And then you go into 2026, 2027, and you keep moving forward. And that rate very quickly starts to look actually like a developed economy, like a Canada, like a US, but with the absolute level being, again, as I said, closer to like a Thailand or a Mexico. Hi, it's Ramit Sethi here. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. people I speak to, 50% of them do not know their own household income. That's not a typo, 50%. That's because money is confusing. In my new book and podcast, Money for Couples, I help you and your partner create a financial vision together. To listen to this podcast, just search for Money for Couples. You know, you mentioned that the government has stepped in, and I want to get to that in a moment, but it took them a while to do something here, right? And I have seen many analysts say that there was a reluctance on the part of the Chinese government to intervene. And

why do you think that is? And then why have they now intervened? You know, there's a lot of reasons for it. I think you can look at the quality of the information that gets up to the very top in China. I think there's always a question about whether or not the government system here, you hear the same thing said about Russia, about whether bad news makes its way to the top. I think the other is whether or not Xi Jinping is really all that concerned about it. I think that there was a sense for many months that he was shifting his priorities, that we need to start thinking about building up our resilience as a country, making sure our

economy can withstand an external shock if the U.S. were to try and squeeze our supply chains or block our EVs from being exported to their countries, as indeed we're now seeing, right? So he's saying different things like maybe economic growth for the sake of economic growth is no longer the be-all end-all. And then, you know, I think ultimately, though, a lot of experts had sort of come to the conclusion that it really came down to social stability, and whether or not there was any real worry about that, because that is the bottom line for Xi Jinping for the Communist Party here. What we're now seeing is that some of this economic pain we've talked about is starting to show up in society.

It's starting to show up with people who don't have jobs getting up to no good. It may be that you have, you know, their own internal people starting to speak up and say, listen, we do have some bad news coming if we don't start to fix this, you know? And I think that may be a part of it. So what did they end up doing? And how are people responding to it?

So what they ended up doing was over the past week, and I'm talking starting Tuesday of the last Tuesday in September, the central bank in China unloaded with a whole bunch of measures here. The bank's lowering of the stock mortgage interest rate will reduce borrowers' mortgage interest expenses. We estimate this policy will benefit 50 million households and 150 million people, benefit 50 million households and 150 million people, reducing the average annual household interest bill by about 150 billion renminbi. They rolled out new measures almost every single day and part of it is lowering borrowing rates, part of it is eliminating restrictions on what kind of people can buy homes and all of that is meant to

stimulate the economy, stimulate home buying again, get people excited about the economy. And what was really interesting is that they also had a couple of measures that were directly targeted at stimulating the stock market. And that's something that the Chinese government doesn't do very often, because there's always a sense here, especially Xi Jinping kind of tolerates the stock market, but he doesn't necessarily want to make it rain, as it were. He doesn't really want things to really get too red hot on the stock market. But they were talking up the stock market to the point where if you have a little bit of money, basically, you put it into the stock market. And that's what a lot of people did over the past week. And so we saw stocks go up more than 10% in a week, which is a lot for China or anywhere.

And just I don't want this to be too obvious a question, but why do that then? You know, I think what a lot of people have stated is that at heart, what we have here is we do have a crisis of confidence. We have a crisis of confidence that is impacting people's willingness to spend money. And that can mean on the biggest things that we buy as people, which is homes, but also cars, but also dining out, also plane tickets, also just buying knickknacks and other things and consumption had gone down, or the growth had slowed. All of that sort of has this vicious cycle effect where when people aren't spending, then that money doesn't circulate through the economy and it creates its own kind of self-fulfilling prophecy.

So what you needed was you needed someone to sort of shock the system a little bit and get people excited again. And indeed, as I mentioned, you can see on the stock market that that excitement has resulted in stocks going up 10% in a week. Now, nobody thinks that is sustainable either. But I think the idea is that you get people feeling like they've got money again, that they're sitting on some savings, that they're starting to feel good and they start spending money and that hopefully primes the pump and gets things going. I think that's the hope.

Are there concerns that they could do too much too, right? Yeah, there is. I think we saw in 2008, during the global financial crisis, China launched a big stimulus. And at that point, it was primarily built around infrastructure. So bridges, tunnels, rail lines, airports, they built a lot of stuff like that, because that was something that they could do, it would employ a lot of construction workers, they could build things that It would create economic activity because each of those workers would be paid their salaries. They would then go and spend money. And, you know, the idea was that these rail lines would stimulate more economic activity. China now has too much of this stuff. And so I think they learned the lesson from 2008 that if you go overboard a little bit,

you end up with a lot of waste. You end up building a lot of stuff that doesn't need to get built. For so long, for so long, China has been so central to the global economy. And what implications does the slowdown in growth, well, for the world's second largest economy, have on the rest of the world? Well, the most obvious thing is natural resources. And you have countries like Australia, like Canada, that sell a lot of natural resources to China. And so if you're building a ton, like China has been,

then you're selling a lot of natural resources to China. But if China is not building so much, then that changes the equation quite a bit. And indeed, I think part of the problem in China, and I know this will be shocking to most listeners, but there are too many homes in China. The last thing you need is more steel, more timber, more stuff like this to build even more of this stuff. So I think that's going to be a real challenge, I think, for the rest of the world. And then the other side of the equation is that you have chinese consumers who are not going to be buying as much stuff from outside the country so to give canadian examples it may be fewer lululemon stuff it could be less canada goose uh less tim

hortons all of those brands are here in china and they're, uh, it's a big market. And so if people aren't feeling confident, they're not going to spend however much you need to spend to buy a Canada goose jacket because those are not cheap. Right. So that's the sort of thing to where it does hit the rest of the world in the pocketbook. All right. Uh, Jonathan, this is really interesting. Thank you so much for coming on. It's always such a pleasure. Thanks for having me. I hope that was good. All right, that is allbc.ca slash podcasts.