After China's stock market fell from its historic high in June 2015, Beijing started to rein in the real estate industry. Xi Jinping warned in 2015 that “houses are for living in, not for speculation.” His concept was affirmed at the Central Economic Work Conference in 2016. The 19th National Congress of the Communist Party of China (CPC) incorporated Xi’s concept into policy priorities in 2017 After the U.S.-China trade war broke out a year later in 2018, Beijing feared that the scale of real estate debt would negatively influence the stability of its financial system. Accordingly, China began to implement a policy to cool off the real estate market in August 2020. Since then, real estate defaults have successively emerged. Evergrande defaulted on its debts in September 2021, owing suppliers, creditors and investors a total of $300 billion, equivalent to 2% of China’s GDP in the previous year. Shares of Evergrande were suspended from trading on the Hong Kong exchange on March 21st, 2022.
Country Garden, China's largest real estate developer, also took a turn for the worse in the first half of 2023. Its sales contracts in the first half of the year fell by 1/3 compared with the same period in 2022. International credit rating agency Moody’s downgraded Country Garden's corporate family rating (CFR) to B from BBB. meaning that their bonds were at “junk” status with a negative outlook. Country Garden suspended trading in eleven of its onshore bonds amounting to 16 billion yuan in the Hong Kong Stock Exchange on August 14th. The company's share price also dived to HK$0.8 per share, even lower than during the 2008 financial crisis. Defaults on real estate debt continue in China.
There are two main reasons for China's economic contraction. First, Trump signed a presidential memorandum targeting China's economic aggression on March 22nd, 2018 and launched a trade, tariff and technology war against China. Second, COVID-19 started in Wuhan in early 2020 and ultimately spread around the world. China implemented a zero-COVID policy, which had a grave impact on the production of enterprises. This policy did not end until late 2022 due to the White Paper Protests.
The two developments dealt a severe blow to China’s economy. China managed a growth rate of 6.4% in 2017. But its GDP growth dropped to 4.6% after China was sanctioned by the U.S. in 2018. China managed to grow by 6% in 2019. Then its growth rate fell to 2.2% in 2020 due to COVID-19. China’s GDP rose sharply to 8.1% in 2021. It then grew by 3% in 2022 and 5% in 2023. China’s GDP is predicted to grow by 4.5% in 2024. A comparison between Japan’s economic and financial development in the past and China’s in the present showed the following differences. The two countries have different patterns of currency appreciation. Japan’s currency appreciated speedily since December 22nd, 1985. Five years of foreign investment influx resulted in the appearance of the stock market and real estate bubbles in 1990. The appreciation of the renminbi (RMB) began on July 1st, 2005. RMB appreciated gradually from 8.2 yuan to $1 to 6.04 yuan to $1 on February 14th, 2014 and then depreciated. This kind of moderate change slowed down the pace of economic development and delayed the time of falling into the “middle-income trap.”
Japan has seen frequent changes of ruling governments and prime ministers over the past 33 years since deflation started. However, Xi Jinping's regime has been stable since it implemented restrictive real estate policies in 2016. Every Japanese prime minister wanting to raise the consumption tax would be forced to step down. But China’s social and political situation has not gotten out of control even as it cut civil servants' pay and companies laid off employees starting from 2022. Both facing an economic war launched by the U.S., Japan and China react with noticeably different response and maintain different levels of composure, highlighting the difference between democracy and totalitarianism and the obedience of the people.
Since the Nikkei 225 stock price index of the Japanese stock exchange fell off its pedestal in late December 1989, Japan’s economic growth rate began to follow a long-term downward trend from 4.93% to 4.84% in 1990, 3.52% in 1991, 0.9% in 1992, and -0.46% in 1993 (five years later). Japan’s economic growth fell sharply to 0.98% during the financial crisis in 1997. 1998 and 1999 mostly saw negative growth. Japan’s growth rate nosedived to -1.22% and -5.69% during the global financial crisis in 2008 and 2009 and then -4.51% in 2020. When deliberating on China’s situation after it enters the bottleneck period and how it will escape from difficulties in the future, we should also include the development of the U.S. economy over the past century for research comparison besides information related to Japan.
（Chih-Chang Chiu, Adjunct Associated Professor of the Department of Statistics at Tamkang University）
（Translated to English by Cindy Li）
