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Policymakers, concerned about incentivizing reckless mortgages, are investing heavily in factories and looking to help indebted local governments.
By Keith Bradsher
Information from Guangzhou and Weifang, China
China’s political leaders, under pressure to shore up the country’s fragile recovery, are slowly guiding the economy in a new direction. No longer able to rely on genuine real estate and local debt to fuel growth, they are investing more in production and expanding downtown. government indebtedness.
For the first time since 2005, when China began keeping comparable records, state-controlled banks have begun steadily easing mortgage lending, data showed last week. Instead, massive sums are funneled to manufacturers, especially in fast-growing sectors such as electric cars. and semiconductors.
There are dangers associated with this approach. China has a chronic oversupply of factories, far above what it wants for its domestic market. Higher production will likely lead to more exports, a build-up that may disappoint China’s trading partners. China’s new loans also pose a challenge. to the West, which seeks to encourage greater investment in some of those same industries through legislation such as the Biden administration’s Inflation Reduction Act.
The shift to production lending underscores Beijing’s reluctance to bail out China’s debt-ridden asset market. Construction and housing account for about a quarter of the economy and now come from a sharp drop in prices, sales and investment.
China’s investment efforts may simply breathe life into the expansion in the coming months, partially offsetting difficulties in the asset sector. But more central government borrowing, replacing local borrowing, will do little to ease the long-term drag on expansion caused by debt accumulation.
“I don’t think there is a challenge for development in the short term, but we want to get involved in development in the medium and long term,” Ding Shuang, lead China economist at Standard Chartered, said at a recent forum of economists and monetary experts in Guangzhou. It’s fair to say that real estate is at the bottom. »
China’s property crisis has its roots in four decades of debt-fueled assumptions that have pushed costs well above levels that would be justified through rents or household income. Chinese authorities sparked the sector’s recent decline by starting to curb lending several years ago, and now they are reluctant to bail out the sector by launching a new real estate lending frenzy.
The government’s idea that China’s economy would recover in 2023 after the country’s leaders lifted the maximum “zero-Covid” restrictions that wiped out the economy last year. But after an initial burst of activity, expansion slowed in the spring and summer. Remaining: Production activity retreated last month, following expansion in August and September.
Last week, at a convention chaired by Xi Jinping, China’s most sensible leader, the Communist Party and government officials met privately to discuss monetary policy. According to a later official statement, the convention mandated that more monetary resources be channeled into complex productive industries. , as well as aid to local governments.
While the real estate market is struggling, factory construction, fueled by government-backed financing, is in full swing.
China has already built enough solar panel factories to meet the world’s desires. It has built enough car factories to manufacture all the cars sold in China, Europe, and the United States. And by the end of 2024, China will have built as many petrochemical plants in just five years as all those operating in Europe lately, plus Japan and South Korea.
Economists at the recent collection in Guangzhou, organized through the International Financial Forum, a Chinese think tank, said the country faces difficult situations that have not been noticed since the years immediately following Mao’s death in 1976. But they predicted that large investments in new production technologies would pay off. Disabled.
So the question now is: what will be the long-term of innovation-led growth?” said Zhang Yansheng, a former senior official at the central government’s economic planning firm who now works at the China Center for International Economic Exchanges.
The shift in China’s banking formula from mortgage lending to production began several years ago, Bert Hofman, director of the East Asia Institute at the National University of Singapore, said at the Guangzhou event.
Before the pandemic, Chinese banks were expanding their mortgage lending to more than $700 billion a year. In the 12 months through September, notable overall mortgage lending declined slightly. Banks lent less to developers, and families paid off old mortgages and took out fewer new ones. some.
By comparison, net loans to commercial corporations rose from $63 billion in the first nine months of 2019 to $680 billion in the first nine months of this year. Some of that cash has been spent on building a semiconductor industry that may allow China to move forward. move away from imports and circumvent U. S. export controls, as well as in sectors such as electric car production and shipbuilding.
Many economists have expressed fears that spending more money on production won’t affect the economy as a whole. The real estate sector is still in decline and is so large that it will not be easy to compensate for its disruptions with the expansion of industries such as automobile production, which accounts for 6% to 7% of economic output.
The factory-building craze threatens to antagonize other countries: much of the extra production will most likely be exported because many Chinese families have cut back on spending.
But the United States and the European Union are not willing to settle for a further increase in their industrial deficit with China. The European Union is already investigating the use of government subsidies through China’s electric vehicle industry, opening a new industrial divide between Brussels and Beijing.
Aware of those risks, China is courting rising countries. These countries still have a giant, albeit ageing, production sector that provides an outlet for exports from the newly built and highly effective Chinese factories. Many rising countries are struggling to renegotiate gigantic debts with Beijing for infrastructure projects, putting them in a weak position to raise the price lists of Chinese goods.
Chinese factories have been gaining dominance for decades. The country’s share of global production has nearly quintupled to 31% since 2000, according to data from the United Nations Industrial Development Organization. The U. S. share fell to 16 percent, while emerging China’s share remained solid at 19 percent.
Of course, one thing remains true of China’s approach: its reliance on debt to boost growth.
The government has tried for years to rein in its reliance on debt. Liu He, the vice premier, promised in a speech in 2018 that this would happen within three years.
By contrast, local government debt has risen since 2020, reaching just about $8 trillion last year, and local governments’ semi-independent loan pools have racked up billions more in borrowing. China’s overall debt has soared to significantly higher levels, relative to the country’s economic output. , than the debt of the United States and many other evolved countries.
Yao Yang, director of Peking University’s National Development School, said in September that debt efforts had been unsuccessful.
“Between 2014 and 2018, which have been a window to deactivate debt, debt skyrocketed; The scenario worsened after 2020,” he said in a speech. “This indicates that past debt de-escalation measures were futile and, in some cases, counterproductive. “. »
Siyi Zhao contributed to the research.
Keith Bradsher is the Times’ Beijing bureau leader. In the past he served as bureau leader in Shanghai, Hong Kong and Detroit, as well as Washington correspondent. He lived and reported in mainland China about the pandemic. Learn more about Keith Bradsher
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