China is teetering on the brink of recession — excluding the Covid era, for the first time since 2008 — as new data showed industrial production shrank for a fourth straight month while new orders data was particularly weak. The above data are indications that China’s economic model, which was based on
- in cheap labor,
- the export orientation and
- the large trade surpluses is in decline – if not decline.
Simply put, weak growth has turned into a downturn in economic activity.
- Manufacturing represents 1/3 of China’s economic activity — much more than in the US.
- The collapse of China’s property market – another third of China’s economy – adds more fuel to the fire.
However, China’s position as the world’s second largest economy continues to position it as a major player on the global economic stage. With Chinese production back up and running after the health crisis and lockdowns, problems in the supply chain have been addressed, which lends particular importance to developments in it. 
Alert to the Chinese Communist Party
The Politburo meeting, held on Thursday, September 26, 2024 and chaired by the General Secretary of the Communist Party of China XI Jinping, decided on a huge package of measures to stimulate the economy: the country must implement existing policies more effectively, make development measures more targeted and effective and to try to achieve the goals for this year’s economic and social development.
The government plans to spend about 1 trillion yuan ($142 billion) to recapitalize six major state-owned banks, and given the National Financial Regulatory Commission, that regulators will proceed with capital increases at six major banks. Bankruptcies by property developers – after a crash several years ago due to over-lending in the sector – have weighed on the banking sector, leading to the latest bailouts.
Interest margins and bank profits have shrunk, so “coordination of various liquidity channels is necessary to replenish capital. For its part, the People’s Bank of China (PBoC) should reduce reserve requirements (RRRs), implement significant interest rate cuts and put most property developers back on the “White List” to allow them to borrow from the banks more easily. It said that local governments should strictly limit the number of new homes built, reduce property stocks, increase the quality of existing homes and reclaim idle sites from property developers at reasonable prices. Local governments should improve their fiscal and financial policies to support real estate markets. After the United States Federal Reserve cut its key lending rate by 0.5% to 4.75% to 5% on September 18, the PBoC announced on Tuesday its plans to lower borrowing costs and allow banks to raise the borrowing. 
Economic challenges – Real estate purchase and exports
Significant challenges in the real estate sector and weak export growth are contributing significantly to the drag on China’s economy.
- New home prices last year experienced their biggest drop since early 2015.
- Property investment fell 5.7 percent year-on-year, and in August, Chinese home prices, on average, fell at the fastest pace in nine years.
- Although the Chinese government implemented a re-lending program to buy unsold housing stock, it did not reduce the slide in property valuations.
- Exports, an important linchpin for China’s economic growth, fell 4.6 percent in 2023, the first annual decline in export activity since 2016.
- More encouraging data emerged in early 2024, with China’s exports growing 8.7% in the one-year period ending August 2024
- Despite recent weak data, China remains the world’s largest exporter of manufactured goods.
- However, ongoing trade disputes with the US and other countries are unlikely to help boost exports.
Offices emptier than the Covid era
- The main cause of empty offices is a decrease in activity.
- In Shanghai, office vacancies are at 21%.
- In Shenzhen province, China’s main export hub, vacancies are at 27%.
- Both figures are records since the Covid era.
- Rents in Shenzhen province have collapsed 15% year-on-year (August).
- Of course, China’s official GDP numbers are invulnerable, but then no one believes them — not even in China.
- Foreign investment in China has fallen by a third in the past year.
- They are vacating their Chinese offices and setting up branches in safer places like Vietnam or Mexico, with the factories following.
The youth employment crisis
- The contraction is hitting young Chinese the hardest, with youth unemployment – especially among graduates – soaring to nearly one in four young Chinese out of work.
- With a record number of 12 million Chinese students set to graduate and enter the job market, it is pointed out that they will not like the picture they will face.
- All of this, of course, has social implications.
- Public protests are now growing in China, with demands including free elections and former members of the Armed Forces accusing the government of… strangling them.
- Worker strikes have soared, including 1,000 workers at a Nike factory who, ironically, revolted after production was moved to Indonesia.
- Along with hundreds of unpaid construction workers going on strike as property construction collapses.
- The background here is hundreds of millions of Chinese working informally — you need a kind of domestic passport to move to a big city where wages are decent and most rural Chinese don’t.
- But you also need fifteen years of official work to get state pensions.
- This means that for older workers, especially those without children thanks to government birth control, layoffs could literally mean they’ll still be working into old age.
- They are desperate.
What went wrong?
- Growth under President XI Jinping has halved to half its former rate that created the economic miracle – China is now growing like a normal middle-income country.
- That’s because Mao-loving Xi has destroyed business — even “disappearing” prominent businessmen like Alibaba’s Jack Ma.
- Meanwhile, Xi has pumped trillions of dollars into industries favored by the government — above all, green energy and housing.
- Both have now collapsed due to overcapacity and reduced demand.
- For example, in one province, China had nearly 1,500 electric car manufacturers. Almost all have either collapsed or are in the process of declaring bankruptcy.
- Meanwhile, there are at least five and a half trillion dollars in bad loans in the real estate market, with millions of Chinese losing the half-built apartments they had invested their savings in as developers do not move forward with projects.
- Between the housing collapse and stocks that have remained flat since 2008, the Chinese don’t have the money to keep spending, further draining the economy due to reduced consumer spending.
What’s next?
The last time China experienced a recession, in 2008, Beijing pumped huge sums into the economy. This time, China’s debt – over $50 trillion – has grown to the point where it cannot afford it. The social contract in China is based on the obedience of workers to achieve the development standard.
If the government cannot contain growth, historically, the Chinese have become very mobile. There is a reason Xi is installing a police state, but of course, if opposition is widespread enough, even the most repressive measures will fail.
China could be in for a rough ride. And if it gets desperate and needs a nationalist distraction, it could drag Taiwan—and America—into the coming geopolitical storm.
