President Joe Biden has called dramatic attention to China’s economic woes. At a political fundraiser in August, he noted that China’s economy is “in trouble,” describing it as a “ticking time bomb.”
No doubt the president again yielded to his weakness for hyperbole, but there is nonetheless some truth in what he said, enough truth to elicit a prompt and bitter response from Beijing. If, as President Biden says, China faces significant challenges, it isn’t apparent what good it does—for either diplomacy or economic progress—to exaggerate or otherwise speak in such terms.
According to the transcript of President Biden’s talk, he believes that China’s economic challenges are “not good because when bad folks have problems, they do bad things.” He informed his audience that China needs to maintain an annual real growth rate of 8 percent, but it’s now growing closer to 2 percent a year.
It’s a mystery where the president got these figures. To be sure, it is widely noted that the Chinese Communist Party has an implicit contract with the Chinese people in which it remains in power as long as it delivers prosperity. But nowhere is 8 percent mentioned. Nor is the 2 percent ongoing growth rate especially accurate.
Beijing responded quickly and sharply to President Biden’s remarks. Though Chinese spokespeople never challenged President Biden’s questionable figures, Liu Pengyu of China’s Washington embassy objected to the speech’s “smearing China” and “talking down China’s prospects.” He warned Washington of “scapegoating China” and sowing “division and confrontation.” Xin Qiang, director of the Center for American Studies at Fudan University, told Global Times that Washington is using China to “distract voters from ingrained U.S. domestic problems such as abortion, guns, and drugs.”
Though President Biden used hyperbolic language and supported it with questionable statistics, China does, in fact, face embarrassing economic challenges. Because of the recession in Europe and slow growth in the United States, Chinese exports—still a mainstay of the economy—are in decline. July figures show that total exports fell by some 14.5 percent from last July’s levels, with exports to the United States down by 23 percent. Meanwhile, Beijing continues to struggle with the collapse of its residential property sector.
The latest bad news in this area is the default of the latest large property developer, Country Garden. The company recently announced that it will fail to pay some $22.5 million in interest on its dollar-denominated debt. This is just the latest in a series of failures beginning in 2021 with the collapse of the huge property developer Evergrande. In between these two events, dozens of real estate companies—large and small—defaulted. In an announcement accompanying the news of default, Country Garden stated that its sales in July were 60 percent lower than a year ago and that its operating deficit for the first half of this year would amount to the equivalent of $7.6 billion.
The authorities, not surprisingly, have blamed the developers. But if the management of these companies has behaved in a less than prudent manner, the problem mostly reflects mismanagement by Beijing. The first mistake was to hype residential property development as a way of boosting economic growth. For years, Beijing encouraged this sector with regulatory concessions and easy financing through state-owned banks. Developers responded actively so that property development not too long ago constituted as much as 30 percent of the economy. As overbuilding became obvious in 2019, Beijing suddenly reversed its former support, ostensibly to curtail speculation. It would have done better to have managed a gradual transition, as the sudden removal of support put the already highly leveraged companies in an impossible situation. Default was unavoidable.
Beijing compounded the economic problem by refusing to help financial markets cope with the huge losses. The sudden collapse of these developers left those who had prepaid for apartments unable to take possession. Their subsequent refusal to pay on the mortgages they had taken out left banks—both private and state-owned—in difficult positions, which curtailed lending generally. Consumer spending and investment slowed, as did the confidence on which all economic growth rests. The losses have spread through the financial system, so lately, they have begun to impede the use of so-called local-government financing vehicles (LGFVs), which provincial and municipal governments use to finance politically favored businesses and developments.
Despite President Biden’s enthusiasm, there is no bomb in China—physical or metaphorical. However, the Middle Kingdom does face significant economic troubles. As the extended real estate saga shows, the problem lies mainly in the country’s authoritarian, centrally directed approach to economic management. Since Beijing shows little to no sign of changing its ways, the nation’s economic troubles will likely persist for the foreseeable future.
