Since the start of the new year, Beijing’s economic woes have deepened. The slide has been marked by a continuous decline in the stock market, and a bankruptcy filing by Zhongzhi Enterprise Group (ZEG), China’s largest private asset management company. Economists with Switzerland’s investment bank UBS AG issued a cautionary note highlighting real estate as the foremost threat to China’s economy in 2024. Furthermore, Eurasia Group, a New York-headquartered political risk consultancy, has identified “China’s inability to recover economically” as one of its top ten primary global risks in the current year.
China’s stock market began 2024 on a downward trajectory. By last week it had seen a simultaneous decline in all four of its major indices.
On Jan. 8, A-share indices opened low and continued to drop, with daily declines exceeding 1 percent. The Shanghai Composite Index experienced a notable 1.4 percent fall, breaching the 2900-point mark and marking the largest single-day decline in over a month. Both the Shenzhen Component Index and the ChiNext Index closed at their daily lows, reaching levels not seen in over four years.
The Shanghai-Shenzhen 300 Index, considered a blue-chip representative of A-shares, fell 1.3 percent to 3286 points, reaching its lowest level since February 2019. Continuing its downward trend into the new year, the Shanghai-Shenzhen 300 has seen a cumulative decline of over 4 percent after three consecutive years of losses.
On Jan. 5, Beijing’s First Intermediate People’s Court announced the acceptance of ZEG’s bankruptcy liquidation application, citing an inability to repay maturing debts, insufficient assets to settle all debts, and an obvious lack of liquidation capability.
Established in 1995 and headquartered in Beijing, ZEG was once China’s largest private financial group. The firm oversaw more than $140 billion in assets at its peak, but faced a liquidity crisis after the sudden death of its founder, Xie Zhikun, in December 2021.
UBS Warning: Real Estate Is Biggest Risk to China’s Economy
Wang Tao, UBS Investment Bank’s Head of Asian Economic Research and Chief China Economist, issued a stark warning last week that real estate continues to pose the most significant risk to China’s economy in the current year. She anticipates a slower decline in the property market compared to last year but emphasizes that insufficient policy support may worsen the property market downturn, exerting additional pressure on economic recovery.Speaking at the UBS 24th China Conference on Jan. 9, Ms. Wang revealed UBS’s projection of China’s economic growth at 4.4 percent for the year, a decrease from 2023’s estimated 5.2 percent. The adverse impact of real estate on the economy is expected to diminish this year after reaching its peak in 2022. Under these assumptions, a modest decline in real estate prices may be observed.
Ms. Wang also cautioned: “If real estate fails to stabilize and continues its decline, it may trigger a more significant adjustment in property prices, leading to a further slump in resident confidence. This poses a substantial threat to economic stability and stands as the primary risk to this year’s economic downturn.”
In UBS’s worst-case scenario forecast, a fragile market sentiment, persistently high inventory, and limited policy support could result in a 15 percent to 20 percent decline in new real estate construction this year. Both real estate investment and sales could plummet by over 10 percent, potentially dragging this year’s economic growth below 3 percent.
Exploiting Regulatory Loopholes
China’s continued real estate downturn has resulted in diminished land sales revenue, as local financiers face heightened pressure due to pre-existing strains. Escalating local debt has reached approximately $9 trillion, emerging as a substantial factor in the economy’s deceleration. Unable to meet debt obligations, local governments are finding themselves compelled to resort to continually issuing new bonds to repay existing ones.In January of 2023, the National Development and Reform Commission of the Chinese Communist Party (CCP) introduced new regulations for offshore debt, stipulating that offshore bonds with a maturity of less than one year would no longer require approval. Originally intended to streamline administrative processes, the move came to be exploited by local government financing vehicles (LGFVs).
Data from Tianfeng Securities reveals that, since the relaxation of the regulations, Chinese local governments issued 27 offshore LGFV bonds with a maturity period of 364 days—just one day less than the scrutinized one-year bonds. Shandong province issued the greatest number of these “364-day bonds,” with 12 issues that raised over $1 billion.
According to Reuters, citing “four sources familiar with the matter,” CCP authorities took note of the regulatory gap and recently issued notifications to LGFVs instructing them to cease the issuance of 364-day offshore bonds. The bonds, says one source at a brokerage familiar with local government bond issuance, contradict Beijing’s initiatives to address debt-related challenges and prevent inherent risks.
Eurasia Group Report: ‘False Hopes of a Recovery’
On Jan. 8, the Eurasia Group unveiled its “Top Risks for 2024” report, ranking “No China recovery” among its top ten global risks for the year. Its “Top Risks” report is Eurasia’s annual forecast of the political risks most likely to play out over the coming year.The report predicted that “any green shoots in the Chinese economy will only raise false hopes of a recovery as economic constraints and political dynamics prevent a durable growth rebound.”
It noted that “warning signs of deepening malaise” were seen in 2023, including the withdrawal of foreign investors, Moody’s downward revision of its outlook, stagnation in real estate transactions, and a stock market downturn. Ongoing concerns about escalating geopolitical risks, China’s ambiguous and contradictory policies, and sustained regulatory crackdowns are expected to continue to dampen interest in reinvesting in China throughout 2024.
The Eurasia Group report points out China’s unfavorable demographic structure, diminishing labor cost advantage, substantial debt burdens, particularly at local government levels, reliance on state investment for growth, and Western efforts to “de-risk” as additional factors that will hamper China’s economic recovery.
The report also predicts a waning momentum in the reopening of China’s economy post-pandemic, persistent weakness in the real estate sector, a slowdown in international demand for China’s exports, and the continuation of phenomena such as defaults by Chinese developers and bank closures.
The report further anticipates that Xi Jinping’s consolidated power and the prioritization of security over growth will not only impact the confidence of consumers, businesses, and investors, but will also impede the regime’s responsiveness to economic and financial vulnerabilities. Collectively, these factors are expected to exacerbate the downturn in the Chinese economy, “expose gaps in the legitimacy of the Chinese Communist Party (CCP) and increase the risk of social instability.”
