Recession: Dark clouds over China

China’s economy, the second largest in the world, has the flu that threatens to infect the whole planet. Some of the ingredients toward a full-blown recession include an extensive lingering drought, a supply chain crisis triggered by lockdowns, power shortages inducing rationing, the “chips war” with the United States which is affecting the production of a wide range of electronic devices from cellphones to attack drone, hypersonic missile software, to name a few.

In Sichuan province, giant ten-foot-tall ice blocks have replaced air-conditioning in public places. Assembly plant laborers work in dim lights with electric fans. There are power cuts of six to eleven days in places. Sixty-six rivers in 34 provinces have dried up. Rainfall is down 50 percent with the power grid wavering due to China’s 90 percent dependence on hydroelectric power, affecting about five million people. There are no short-term quick solutions in sight to the power crisis.

Ironically, the floods of the past have evolved into the drought of the present. In Leshan, floods in 2020 triggered the water level to reach the toes of a giant statue of Buddha, a UNESCO Heritage Site.

Today, the water level is several meters down. In August 2022, 39 factories were closed, more than double the previous week. Temporary shutdowns may become permanent over time.

A huge market for second-hand luxury items is emerging in big cities, hinting that the rich are now becoming cash-strapped. Prices of basic commodities are up. Inflation has caused cash to be king. A recession is brewing, threatening economic disaster.

The real estate industry is a major economic catalyst for recession. The real estate bubble in Japan proved that prices forever going up is a myth. Back in 2008, the US housing bubble ground to a halt, inducing the Lehman Bros. financial crisis. The same tragedy is now happening to China’s version of Lehman, Evergrande. A major lender to Evergrande seized its $1.2 billion Hongkong headquarters and assigned it to a receiver. Previous efforts to sell were derailed when interested buyers discovered the super-low bid prices were induced by a cash-strapped Evergrande.

A lot of foreign capital is invested in China real estate. A real estate bubble burst in China will leave these foreign investors, like Goldman Sachs, unpaid.

UBS reports that China’s offshore bond market has a debt of $209 billion, $19 billion of which is the Evergrande debt, or 10 percent of the total. The first victims in a China bubble burst are the suppliers, such as steel and appliance makers. About 29 percent of China’s economy is on real estate. If its real estate industry falls, the entire China economy falls, then its foreign investors fall, all in a massive global ripple effect.

China’s imports of $2 trillion will also fall, triggering consumer markets vanishing, triggering in turn massive closure of factories and unemployment. The same is true for exports. Total China exports are 27.4 percent electronic machinery and 17 percent computers. These two alone, a total of 40 percent of exports. A debt crisis and a recession will make these exports disappear.

The whole of humanity is at a precarious crossroads never before seen. We are all forever interconnected. If a superpower sneezes, we all catch the flu faster than a new Covid variant. Economic analysts pose that a growth economy fuels globalization, and a declining economy fuels isolationism. Once we are stuck with each other, it may be hard to get “unstuck.” We are hopelessly inextricably inter-connected. Economic meltdown will trigger a painful return to basics. Before, mountain people headed for the city. Today, city people may start heading back to the mountains, surviving in cashless subsistence-based isolation.

(Sources of quantitative date – WION – Gravitas.)

Leave a Reply

Your email address will not be published. Required fields are marked *