Ongoing lockdowns and the “unwinding” of a large credit bubble have seriously harmed China's financial state, and many are now wondering if and when the government will intervene, an adjunct fellow with the Center for Strategic and International Studies (CSIS), said in a commentary.
"It is not surprising that China is now facing widespread financial distress, with more to come as the property sector’s woes emerge within the financial system. A credit bubble of historic proportions that drove China’s growth over the past decade is currently unwinding and slowing the economy as a result,” Logan Wright, adjunct fellow (non-resident) with the Trustee Chair in Chinese business and economics at the Center for Strategic and International Studies (CSIS) said in his commentary. “Defaults on multiple asset classes, along with failures at banks and other financial institutions, have raised new questions among depositors and investors about when Beijing will finally intervene more forcefully. It is difficult to overstate just how disappointing China’s economic performance has been so far in 2022. The slow-motion financial crisis now unfolding in China is exactly what should be expected as a historically large credit bubble unwinds."
Ongoing lockdowns in China have contributed to much lower economic growth than was anticipated at the beginning of the year, with Q2 data showing only 0.4% year-on-year real GDP growth, according to a CSIS report. New lockdowns coupled with national testing requirements for holiday travelers “have dampened the economic mood in early autumn.” Consumers have slowed their spending in the face of uncertainty around employment and income in some sectors. The report pointed to mortgage boycotts and protests at banks as evidence of increased financial stress.
Protestors gathered outside four banks in Henan to demand that the banks unfreeze their assets, the BBC reported. A July protest in Zhengzhou, Henan's capital, turned violent. Protestors said their deposits had been frozen since April and their banks had not been communicative with them. Police told them to leave. A group of unidentified men who were not in uniform then began hitting, shoving and throwing water bottles at them.
The property sector represents around 24% of China's GDP. Thanks in part to coronavirus-related restrictions, revenue from property sales in 2022 has declined by 31.4%, according to the CSIS report. Developers have been unable to sell properties purchased in the last few years. Local officials have been urging their subordinates to purchase properties, even if they don't need them. Developers are now looking to Beijing for financial assistance, according to the report.
Since June, Chinese homebuyers have been protesting stalled construction by refusing to make mortgage payments, Reuters reported. The boycott has spread to at least 100 cities throughout China.
Wright wrote that some of China's financial woes are to be expected due to the rapid expansion of credit from 2007 to 2016, with credit growth averaging 18.1%. At the end of 2016, Beijing began a deleveraging campaign, halving credit growth over the next several years by cutting off borrowers and reducing the “shadow banking system.”
