China’s property crisis seems to be deepening as a growing number of households refuse to make mortgage payments on properties, they bought but are yet to be completed. This mortgage boycott, which now involves around a million households, could cause China’s property crisis to spread to the country’s banking system. That, in turn, threatens to hobble the country’s growth prospects by landing its banking system with a mountain of non-performing loans much as occurred during Japan’s lost economic decade’s if this were not sufficient reason for concern, China has been engaging in aggressive military exercises near Taiwan, perhaps to distract from its economic woes in the run-up to the convention. This is already discouraging foreign investment and raising questions about the wisdom of relying on China as a key part of the global supply chain and on Taiwan as an important supplier of electronic chips.
China’s crackdown on property developers and its draconian “Covid Zero” policies are bad news for most of its people, as well as businesses abroad hoping to make money from Chinese customers. But China’s internal troubles have an upside: lower demand for imported metals, energy, food and capital goods is alleviating inflationary pressures in the rest of the world. For the first time in decades, the country’s enormous trade surplus is a boon for workers elsewhere. The downturn in the housing market began last summer in response to government restrictions on mortgage borrowing and developer leverage. The plunge in demand has flowed through to new building, with the amount of “residential floor space started” in April-June 2022 down by nearly half compared to last year. The pace of homebuilding has not been this slow since 2009. The result is extra supply for the rest of the world. Iron ore, metallurgical coal and copper are essential materials for making construction steel, household appliances and electrical wiring. Before the recent downturn, China consumed about two-thirds of the world’s iron ore and metallurgical coal and about 40 per cent of the copper. Lower demand means lower prices. Compared with the recent peak in July 2021, iron ore futures are down by half, while Chinese metallurgical coal prices are down by about a third. Global copper prices have dropped by a quarter despite the expected tailwind of additional climate-related green investments in the US and Europe.
There’s never a good time for a slowdown in China, the world’s second-largest economy. However, now seems a particularly bad time for the challenged economies of the United States and other nations. Economic powerhouse Germany, which is highly dependent on China for its exports, is already having to cope with large Russian energy-supply cuts. At the same time, the heavily indebted emerging-market economies, already on the cusp of default, can ill afford additional downward pressure on international commodity prices that a further slowing in the Chinese economy would entail. From a US perspective, the grim Chinese outlook has to raise questions about the wisdom of the Federal Reserve’s current hawkish monetary policy when the US already appears to be on the cusp of a recession. Not only is China’s slowing economy likely to continue relieving US inflationary pressure by contributing to a further decline in international energy and food prices; it’s also likely to restrict US export prospects by contributing to a further slowing in the global economy.