The Daily - China’s Economic Rebound Hits a Wall

Episode Date: July 17, 2023

When China suddenly dismantled its lockdowns and other Covid precautions last December, officials in Beijing and many investors expected the economy to spring back to life. It hasn’t worked out that way.Daisuke Wakabayashi, an Asia business correspondent for The Times, explains why China’s economic rebound hit a wall, and what it says about the country’s next chapter.Guest: Daisuke Wakabayashi, an Asia business correspondent for The New York Times.Background reading: Policymakers and investors expected China’s economy to rev up again after Beijing abruptly dropped Covid precautions, but recent data shows alarming signs of a slowdown.Nanchang’s skyscrapers represented urban transformation, but the city added apartments faster than its population grew. The result: vacant homes and offices.For more information on today’s episode, visit nytimes.com/thedaily. Transcripts of each episode will be made available by the next workday. 

From The New York Times, I'm Sabrina Tavernisi, and this is The Daily. This is the Chinese dream. The place we used to call Red China has embraced capitalism with a vengeance, and it's going all out. The last three decades, China has transformed itself into an economic powerhouse. For decades, China's economy was the envy of the world, with an unbroken streak of explosive growth. Turn now to China. After three years, the country is reopening its borders

and saying goodbye to a zero-COVID policy. So will this easing and the unleashing of the Chinese consumer help bolster the economy around the world? The pandemic broke that streak, but it was expected to come roaring back. Instead, China's economy has faltered. But the country is now experiencing some evidence of an economic downturn. So now, even as COVID is starting to fade away, investors are left with this problem

that China's economy is looking like it's going to be dragging for quite a while. Today, my colleague, Asia business correspondent Dai Wakabayashi, on why China's economic rebound hit a wall and what it says about the country's next chapter. It's Monday, July 17th. Dai, welcome to the show. Thank you for having me. So, Dai, I've been seeing a lot of headlines recently about China's economy, namely that it's sputtering. Thank you for an expert. Tell me what's going on with China's economy. Yeah, I think that's been most people's perception. And it's because it has been

for the last three decades. China has been an incredible growth driver. Its economy has grown by leaps and bounds. The country has lifted itself out of poverty. And what we have come to expect is that China just kind of continues to be bigger and bigger and bigger. But then COVID hit and China imposed these tough restrictions, limiting sort of the ability of its people to move, travel, go out and shop and spend money in the economy. And so when China actually lifted those measures in late 2022, the expectation was that the economy would come really roaring back. But what we saw was after sort of an initial blip of activity, it hasn't really come back. So it didn't come roaring back.

So what did you start to see? So China came out and said that it expects that the GDP will be around 5% growth this year. And a lot of economists saw that as a conservative estimate, something that was easily attainable. But as sort of the economic conditions has worsened in the last few months, people are starting to think that that might be just right on target and that perhaps it might even go lower than that. Which, of course, is so much lower than what it had been in earlier years. Exactly. And, you know, we saw at the sort of heyday growing by double digits.

And certainly in the sort of late 2010s, you know, the economy was growing 7-8% a year. And so even 5% feels like a rapid pullback. And if it goes even below that, I think it's considered that, you know, the economy has really started to slow down. Okay, so big change going on here. China not growing nearly as fast as it used to. Why isn't it rebounding? What's happening, Dai? Yeah. So, Sabrina, there's a real estate crash that's happening. And real estate is an important part of the economy. Another thing I see is that there's this sentiment amongst foreign businesses, foreign investors, that China is no longer a really safe place to invest. And part of that is driven by sort of the measures that the government has put in place. Part of that is driven by sort of the measures that the government has put in place.

Okay, so let's start with the first driver of this slump that you ticked off, real estate. So what's happened there? So in China, real estate is the biggest sector in the economy. Some people say it accounts for, you know, as much as a quarter of all economic activity. Yeah, and for context, a quarter of the economy is huge, right? Like in the U.S., it's far, far lower than that. That's right. And it's also the place where most Chinese people park their money. So it has been the best way for Chinese people to accumulate wealth.

About 70% of all Chinese household assets are usually tied up in the property market. And it has been a huge driver of growth for China over the last three decades. You know, as China has sort of lifted itself out of poverty, it's done so largely by building more homes, building apartment buildings, building commercial buildings. And all that has fueled the economy for years. buildings. And all that has fueled the economy for years. And it's not just that it's the usual sort of businesses and even consumers that are involved, but it also is a huge part of how local governments get their money. So in China, the government owns all the land and there aren't a ton of taxes. And so the main way that local governments tend to generate revenue to pay for basic services, healthcare, education, even some infrastructure, is basically to sell the right of use on land

that they own. And so basically that property developers, when they want to build a new building, they come into the local government and they say, we want the right to use this land. And then they went in an auction and that money goes into paying for social services. So education, health care, all those kind of things. Okay, so local governments are dependent on real estate development in order to pay for basic services. Because what happens is they lease out the land. basic services. Because what happens is they lease out the land, developers come in, build their buildings, and that's how they pay for pensions and pay for healthcare and do things like that. Correct. But what ends up happening as a result of this is the local government is highly incentivized to continue to build, even when perhaps there isn't the population or the demand

for it. And so this tends to fuel sort of this property bubble that, you know, there are more homes than there is sort of demand for. And what does it look like when that starts to really go wrong? What happens? Yeah, I think like all property bubbles, there's a sort of belief that, you know, the prices will go up forever. And when you start to see sort of cracks in that idea, then confidence starts to wane. And the same dynamics that pulled the property prices higher start to pull them down. And we're starting to see that across China, especially in cities where they have built up very quickly and they don't really have the industries to support it. And so one city that we sort of looked at

was a city called Nanchang, which is the capital of the Jiangxi province in Eastern China. And it is one of these cities where they had built up very, very quickly. At one point, they had as many high rises as Beijing. Wow. Even though Beijing was three times its size

and a very wealthy economy. And so what we're seeing now is that it has about 20% vacancies. It's amongst the highest within China. You know, a lot of the prices have started to fall. And that even though the prices are cheap there, and that's alluring for a lot of young people, they get there and they find out, well, there aren't really good jobs here. You know, the industries that they had been hoping would show up with high-tech jobs, those never really showed up. And so they often go back to Beijing or Shanghai, the big cities, because there's just more economic opportunities there. So this was a city that was built for some future that never really arrived. And now it's buckling

under the pressure of all of this development, all of these high rises to nowhere. Correct. I mean, their whole sort of motto was that we're going to expand and that, you know, we're going to sort of urbanize this place. And ultimately, sort of the jobs never came. And now you have a lot of high rises for, you know, not many people. And Dye, what are the statistics showing how much the property market has dropped? So there's a lot of figures out there right now. Last year, new home sales fell about a quarter from a year earlier. And in June, we saw that some of the biggest property developers in the country reported the sales of property fell 28%.

Wow. So these are huge declines that are happening across the country reported the sales of property fell 28%. Wow. So these are huge declines that are happening across the country. What I would say is that it's being hit especially hard in the smaller places. So when people think about China, they often think about the kind of big cities like Beijing and Shanghai. But the vast majority of the property market is done in these smaller cities. And so when building really slows down in these places,

it has a huge impact on the overall economy because as we said earlier, the property market accounts for a quarter of all economic activity. And so when these cities slow down, all of China tends to slow down. And that's kind of where we are right now. We'll be right back. OK, so Dai, you just explained China's housing market and how that has played a role in the country's faltering economy.

But you also told me that foreign investment is playing a role. So let's talk about that. Walk me through it. You know, after the COVID measures were lifted, what we expected to see was this flood of foreign investment to make up for sort of lost time. But we really haven't seen that. And part of that is because there's this growing concern that China is just not a reliable place for business. And what we started to see after COVID was that companies like Apple moved some production of iPhone to India, moved some production of AirPods to places like Vietnam. And I think that a lot of other companies started to see China as perhaps not what it once was and look for alternatives to China. alternatives to China. Earlier this year, we saw a survey by the American Chamber of Commerce in China, which is the group of the biggest multinationals operating there. And for the first time in that survey's history, more than half their members said that China is no longer

a top three priority of places to invest. And that marks a really big shift because China has long been the place where companies have thought they could find growth. And why don't these foreign companies see China as reliable now? Yeah, I think, you know, you have to remember that for decades, even though China is a communist country, that it's always been considered very business friendly, that it's pragmatic when it comes to issues of the economy. And that's started to change under Xi Jinping. During zero COVID, companies felt like they weren't getting enough information about what was happening on the ground and how long perhaps these lockdowns were happening. And more recently, what we've started to see

is that places like consultants that provide sort of reliable sources of information in a country where that's quite difficult to obtain are now being cracked down upon. So tell me about that. Like, what's the nature of the crackdown? So if you were to go to China and you wanted to build a factory,

you want to know who are my business partners, who invest in my business partners. You want to know all this stuff as a foreign investor. And so that kind of information is pretty hard to get sometimes in China. And so you hire firms to find out who are these people I'm in business with and what are some of the risks that I'm facing? But China started to see this as a national security threat. And you have to keep in mind the broader context here, which is the geopolitical tensions between China and the U.S. have never been higher. These two countries who have long been sort of connected at the hip economically are now starting to see fraying.

And, you know, a big part of that has been these measures taken by the White House to sort of limit China's access to cutting-edge semiconductor technology, which was seen by Beijing as a real provocation. Huge step, very radical step by the United States against China. For sure. And it was seen by them as an effort by the U.S.

to sort of contain China and prevent their rise. And I think with the growing sort of geopolitical tensions and sort of the worsening relationship between U.S. and China, even business information is being sort of swept up under the rug of national security. And it was sort of underscored by changes in April that Beijing made to their counter-espionage law, which was already quite broad and sweeping. And the changes they made made a lot of foreign businesses uncomfortable because it basically put a lot of the things that one would do in the course of doing business, investigating, looking into the background of potential partners as potentially spying. And that caused a lot of concern, I think, in the business community. So basically, they see economic information in some ways as state

secrets and companies that dig it up as spies. That's right. And in the last couple of months against that backdrop, we saw officials raid the offices of two American firms, Mintz and Bain. So in that environment, it's very hard for companies to make sort of longer-term commitments to China, such as building a factory or a facility, adding staff. And so when companies think and they're looking out 10 years for what they want to do, China becomes less attractive of a place to park their money. And do you have any sense of how much foreign investment has pulled back at this point? You know, we saw one analysis saying basically that foreign direct investment in China fell to $20 billion in the first quarter.

Now, that still sounds like a lot of money. But when you compare it to $100 billion last year in the first quarter. Now, that still sounds like a lot of money, but when you compare it to $100 billion last year in the first quarter, that's a pretty significant drop. So $20 billion in the first quarter of the year, but down from $100 billion the year before. Correct. So, Dai, you've laid out really clearly some of the reasons why China's economy stalled. So, you know, domestic issues with the real estate sector, a quarter of the economy, chilling effect on foreign investment with all of the changes that

Xi is making. But I'm still left wondering, what does that feel like for a Chinese person experiencing this? What is happening in Chinese society with these changes? Yeah, there's broad concern about the economy. And the way that sort of manifests is that businesses are reluctant to invest, are reluctant to hire. And, you know, the people who get affected the most are young people. And we've really seen a spike in youth unemployment. It is at a record high, near 21 percent. 21 percent. Wow. Yeah. It's really a shocking number considering that almost four years ago, the number was at 10%. And so young people tend to be the ones who are sort of

most vulnerable when an economy turns south because they have the least experience and they're sort of the easiest to let go when things are not going great. So they've been the ones that have particularly suffered in this downturn. I mean, one in five young workers is a pretty astounding number. Yeah. And all this is happening at a really critical time because in June and July, we're expecting another 11.8 million college graduates to come onto the job market. And these are people who have been sold sort of the version of the Chinese dream, you know, that if they go and work very hard and study for a long time, they will be given a future

that is better than the ones that their parents had, and sort of an upward mobility. And yet they're finding themselves either struggling to find work or being forced to take jobs that they are really not that interested in. So basically, China's college-educated young people, aka China's future, are kind of facing the prospect of, you know, going back to same old factory jobs that their parents had. Correct. And even in jobs that were once sort of seen as stable but not super attractive, such as government jobs, bureaucratic roles, even those jobs are becoming incredibly competitive. We saw last year that basically there are 70 applicants for every one opening. And so even those kind of jobs are in high, high demand. Can Beijing turn this around? Like, is the government talking openly about measures it might take to boost the economy? There is an awareness that something needs to be done about the economy. And we're actually starting to see some policy changes. You know, last month,

China's largest state-run banks lowered interest rates on deposits. The idea is that by lowering those rates, you're giving people an incentive to go out and spend money in the economy instead of just parking the money in the bank. But it's a little too early to tell if that's going to work. Another possible policy idea the country could use is raising exports. And to explain how that might work, the idea here is that by incentivizing companies to produce more goods for exports or make their goods more competitive abroad, it would create more jobs and prompt faster growth.

But that's going to be difficult because there just isn't as much appetite to buy Chinese goods out in the world right now. And just last week, we just got export data that showed exports had dropped 12 percent in June, which is the biggest drop in three years. So it's all looking quite difficult at the moment. So, Dai, coming back to where we started this conversation, quite difficult at the moment. So, Dai, coming back to where we started this conversation, you know, the explosive growth that China saw for all of those years, it really feels like China is very far from those days, that galloping stallion that the whole world wanted a piece of. So I guess my question for you is, is the Chinese economic miracle over? I think it's too early to say that. I do think we are moving to a new phase of the economy where, you know, the Chinese economy may not grow at double-digit rates as it once did,

or even the 7% or 8% that it once did. I think what we're going to see is perhaps a little bit of slower growth. And, you know, it might have to come to, you come to accept a new reality that it won't necessarily be the engine of growth in the world. But I don't think we should dismiss China's importance still in the global economy. It is still the second biggest economy in the world. It has 1.3 billion consumers. It has the most sophisticated and well-built manufacturing industry in the world. And so it'll still remain incredibly important. But I do think that we're starting to transition to a new phase of the Chinese economy. And that transition may not necessarily be smooth.

And what we'll see are perhaps more bumpy periods like we're seeing now. And what we'll see are perhaps more bumpy periods like we're seeing now. And ultimately, how sort of Beijing reacts to those will really tell us kind of what the next phase of the Chinese economy will be. Dai, thank you for coming on the show. Oh, thank you for having me. On Monday morning, China released economic data showing that its economy had slowed dramatically in the spring. The economy grew less than 1% in the second quarter compared to the previous quarter, as exports tumbled and debt-ridden local governments cut spending after running low on money. The figures amounted to a full-year growth rate of a little over 3%, down from about 9% in the previous quarter. We'll be right back.

Here's what else you should know today. Here's what else you should know today. On Friday, Republican lawmakers rammed a deeply partisan defense bill through the House, setting up a showdown with the Senate that could imperil the legislation, which provides pay raises for troops and sets defense policy. The bill would limit abortion access, transgender care, and diversity training for military personnel. Its passage was a victory for far-right Republican lawmakers. But it risks costing the party its majority in the House, as it makes some Republicans in competitive districts a target in next year's midterm elections. Today's episode was produced by Shannon Lin and Rochelle Banja, with help from Eric Krupke.

It was edited by M.J. Davis Lin and Mark George, contains original music by Dan Powell and Marian Lozano, and was engineered by Alyssa Moxley. Our theme music is by Jim Brunberg and Ben Lansford of Wonderly. That's it for The Daily. I'm Sabrina Tavernisi. See you tomorrow.