The Chinese Dragon’s Winter Slumber

Aarush Bathula

It has been quite a few months, perhaps a few years, for Beijing. The Chinese economy has been the centre of much debate and discussion since the global COVID-19 pandemic hit supply chains. The story of the Chinese economy has been fascinating. However, the question now plagues us - have we seen the peak of the Chinese dragon? The property sector crisis that followed real estate giant Evergrande group's collapse, the demographic crisis of an ageing population, and now the looming shadow of an offensive administration in the White House. An analysis of such a behemoth can never be covered in a single article or even a single book, but the economists at Parkview attempt to break down the story into a digestible tale of assumptions, flawed predictions, and volatility.

If you had bought an average piece of land in China in 2005, by 2009, you would have tripled your initial investment. China used more cement between 2011 and 2013 than the U.S. used in the entire 20th century. While all nations responded differently to the Global Financial Crisis of 2008, the Chinese economy doubled down on pushing growth, usually financed through local government debt. The bellwether of this strategy was the property developer Evergrande group. The firm's astronomic growth represented the maturing of the Chinese economy as it transitioned into an advanced economy. Evergrande Group - and China as a whole - built more housing, and this strategy worked. Until, of course, it got to a point where there weren't enough people demanding these housing projects. By 2020, Evergrande Group's unfinished land reserves had enough space to house 10 million people alone. To paint a more accurate picture, here's a quote from He Keng, a former official at the National Bureau for Statistics:

"How many vacant homes are there now? Each expert gives a very different number, with the most extreme believing the current number of vacant homes are enough for 3 billion people. That estimate might be a bit much, but 1.4 billion people probably can't fill them."

In a filing in early 2022, the developer declared that its sales were down nearly 40% year-on-year from 2020 to 2021. The finances propping up the real estate bubble were frail, culminating in Evergrande Group's 2021 default on its debt as it failed to present enough liquidity to keep the business afloat. Eventually, it filed for bankruptcy in 2023. The debacle that Evergrande Group faced wasn't unique: Country Garden Holdings, Kaisa, and Vanke (other players in China's property development sector) faced similar pressures.

Against this backdrop, coupled with the slowing growth of the Chinese economy, we come to the present. For two quarters in a row, the Chinese economy failed to meet its growth target of 5%, worrying the government and investors alike. According to the former head of the International Monetary Fund's (IMF) China division: "The government's growth target for this year now appears in serious jeopardy." That jeopardy could only be avoided through a massive government stimulus to try and boost growth prospects. In early September, the government began to test the idea of a stimulus package with investors while remaining intentionally vague about the means and magnitude of the measures. While the People's Bank of China - the Chinese Central Bank - unveiled particularly aggressive plans of expansionary monetary policy, many analysts held that fiscal intervention was necessary to ensure a smooth and effective bump in growth, given the structural slowdown we discussed earlier in the article. The $142 billion monetary policy rule did, however, put into motion a steady rally in the Chinese markets as investors hoped more significant announcements would arrive later.

Unlike 2008, however, the fiscal policy announcement was also seen as disappointing. In the aftermath of the Global Financial Crisis, the Chinese government injected roughly $600 billion into the economy through a fiscal stimulus effort. This announcement, late in September, was also unusual given its timing - the Chinese government does not usually hold such meetings in September, highlighting the situation's urgency. In any case, the announcement's intentions were lucid: provide support to aid local government debt, buy unsold property to prop up infrastructure development, boost bank lending and support consumer demand. Despite the lack of precise numbers in the announcement, the stock market indices rallied. The Hang Seng Index and the CSI 300 Index surged upwards of 30 per cent in the weeks following the economic stimulus announcement. The positive shock allowed the Chinese stock markets to regain a fair share of the value they had lost in the years since the multiple crises set in.

As of writing this article, the latest stimulus measures announced by the Chinese government, including a fiscal package of RMB 10 trillion ($1.4 trillion), highlight Beijing’s ongoing attempt to stabilise an economy facing mounting structural challenges. However, the mixed response from markets, such as declines in the CSI 300 Index and the yuan, reflects concerns about the efficacy of these measures. While the debt relief initiative for local governments aims to alleviate financial risks and restore spending capacity, the package falls short in scale and scope. By the government's own admission, local governments will save only RMB 600 billion ($83 billion) in interest payments over five years—an annual reduction too small to make a meaningful difference, particularly against local government spending shortfalls nearing RMB 3 trillion this year. Moreover, only RMB 6 trillion of the proposed package constitutes new debt, with the remainder repurposed from preexisting commitments, further diminishing its impact.

The fundamental issue lies in the sheer magnitude of China's hidden local government debt, which the IMF estimates at RMB 60 trillion ($8.3 trillion). The stimulus measures address only a fraction of this, and the limited relief risks perpetuating a cycle of underfunded public services suppressed consumer demand and constrained fiscal capacity at the local level. Without a comprehensive approach, including more extensive fiscal interventions and systemic reforms, the economy is unlikely to meet the government’s 5% growth target. Analysts have noted that this restrained fiscal response may also reflect Beijing's hesitancy to deploy its "fiscal firepower" prematurely, particularly as external uncertainties such as U.S. trade policies under a potential second Trump administration loom large.

The stimulus measures’ timing and focus suggest that the Chinese government braces for further economic disruptions tied to global trade relations. The government’s caution may reflect a strategic decision to conserve resources for a more robust response to potential pressures from renewed U.S.-China tensions. Under a second Trump administration, heightened tariffs, restrictions on technology transfers, and intensified scrutiny of Chinese investments in the U.S. could create significant headwinds for China’s economy. Such measures would restrict export revenues and challenge China's ambitions in critical sectors such as artificial intelligence and semiconductors, further limiting its ability to rely on innovation as a growth driver. These dynamics underscore the precarious balancing act Beijing must perform: addressing domestic financial instability while preparing for the potential external shocks that a Trump presidency could bring.