Trade War

Newsletter 211 - May 19, 2024

Welcome to the 211th edition of Trade War.

China appears to finally be getting serious about reviving its struggling property market. Economic pain visible in empty high rises across country. The contribution of real estate to the economy could drop to 16 percent, down from one-quarter. And April numbers show weak household spending and a strong manufacturing sector, a worrying sign as China unloads excess capacity on global markets.

Hopes that Xi Jinping might put distance between himself and Vladimir Putin have been dashed, following the Russian president’s two-day trip to China. And with Russian-Chinese trade soaring, a parallel economic order is taking shape.

The Biden administration is watching to see whether Chinese EV makers will set up factories in Mexico to evade US tariffs. China’s success in its electric car industry about much more than protectionism. And global car brands are fading fast in China.

• Beijing turns to religion for new state support

• Party members belief in “ghosts and spirits” on the rise

• Left wing in China fades as scholars align with Xi

A housing bailout, finally?

Following the announcement of a government buyback program and mortgage and down payment easing, China appears to finally be getting serious about reviving its struggling property market.

“The centerpiece of Friday’s measures is Beijing’s embrace of a policy already being tested in some cities in China—getting city and local authorities to buy up unsold homes and convert them into affordable housing for low- and middle-income families,” reports the Wall Street Journal.

Also included: an end to minimum interest rates on mortgages and lowering the required down payments for buyers.

These measures signal “the beginning of the end of China’s housing crisis,” predicts Ting Lu, chief China economist at Nomura.

Still, the scale of the problem will be a major challenge. All told there are as many as 30 million unfinished apartments and it would cost at least $440 billion to complete construction on them, according to Nomura.

“This is a little bit similar to the bailing out of financial institutions going through the Great Financial Crisis,” says Zhu Ning, a professor at the Shanghai Advanced Institute of Finance, in an interview on Bloomberg TV.

“But in the end unless the central government is stepping in and extends its own credit to the real estate market, it’s a little difficult or too premature for us to believe we’re out of the woods.”

Property pain visible in empty high rises

“On an eight-stop visit to China last month that included metropolises (Beijing, Tianjin, Shanghai, and Guangzhou) and hinterland cities (Xi’an, Changsha, Liuzhou, and Nanning), it was obvious to this editor that the economy is still struggling, even long after the pandemic,” I write in the May edition of the Atlantic Council’s Global China Newsletter.

“There are far fewer foreign tourists and international businesspeople on the streets than before, (although Russians were prevalent), small restaurants have been shuttered as consumers spend less, pain from the struggling property sector is visible in numerous empty high rises.”

China trip take

The scope of the property-driven downturn was obvious on my recent visit to China.

The following photo essay includes pictures from Xi’an, Shanghai, Changsha, Guangzhou, and Tianjin—the latter being one of China’s most overbuilt and indebted cities.

“One prominent effect of the prolonged property downturn is weak land sales, which reduces an important source of fiscal revenue for local governments,” explains S&P Global in an April note.

Now on the agenda: an effort to work through the substantial leverage now built up across China. “We see restructuring concentrated in debt-laden regions such as Gansu, Guizhou, and Tianjin,” S&P Global writes. And check out this report from the rating agency on Tianjin’s substantial debt problems.

“A group of around 1,500 homebuyers in the Chinese city of Tianjin, near Beijing, have yet to see—let alone move into to—the apartments they said they paid for about eight years ago,” reports CNBC.

“As is common in China, the apartment complex in Tianjin sold the units before they were completed. The promise was that they would be ready by 2019, but the majority are still unfinished.”

On the high-speed train from Beijing approaching Tianjin: many high rises, some of which appear unfinished, and one unidentified pagoda.

I remember when Shanghai’s plan to develop Pudong, a largely barren expanse of agricultural land, was called a “white elephant” project in-the-making, in an article published by the Wall Street Journal in the late 1990s, shortly after I had moved to Beijing and begun writing for BusinessWeek.

Of course, the “white elephant” description has now been proven badly wrong—ah, hindsight! Here is a night view of Pudong from Shanghai’s Bund, last month.

While there were plenty of looming high rise developments in the outskirts of Xi’an, here instead is a picture of the Bell Tower at night, in the heart of the city.

In Changsha, I heard locals proudly proclaim that their city has become popular for young people, in part because it now has some of the cheapest apartments in urban China, after many months of falling prices (I bet the developers aren’t very happy, however.)

Soaring apartment buildings surrounding the urban center of Changsha.

“On Dec 26, 2009, an enormous new sculpture of a young Mao Zedong appeared on Juzi Island in the central city of Changsha,” reported the China Daily in 2011.

“It caught the country by surprise with its depiction of Mao as a young man, with a full mane of wind-swept hair.”

Check out the new skyscrapers in downtown Changsha as viewed from the perspective of Mao—or from the perspective of the massive statue of his head on Juzi Island.

(Also notice the tiny spot of a man standing in the Great Helmsman’s hair, apparently tasked with cleaning it.)

Here is another shot taken from next to the Mao statue, also showing Changsha skyscrapers with more under construction.

“China is the big growth story in Asia. It's a very meaningful slice of our growth. It obviously has a big population, and its wealth and knowledge are growing at a tremendous rate,” Ritz-Carlton president Simon Cooper said to me in an interview in April of 2008, held in the company’s newest luxury property in Guangzhou.

“And China provides not only a domestic market for our hotels here. We are also seeing an outbound market of Chinese staying in Ritz-Carlton hotels elsewhere in the world,” Cooper added.

Notice the logo identifying the Ritz-Carlton at the top of the building on the far right. This busy urban district was quiet and felt distant from the city center in the spring of 2008 when the hotel had just been completed.

“Located at the convergence of the Pearl River in the Bai'etan business district, directly across from Shamian, the Greater Bay Area Art Center stands as a prominent structure, reaching a height of 78.5 meters with 11 floors above ground and two underground,” reports the Guangzhou Foreign Affairs Office.

“The art center draws its architectural inspiration from the silhouette of a grand white ship ready to set sail, embodying the rich cultural essence and artistic allure of Guangzhou.”

Here is a picture I took standing outside the White Swan Hotel on Shamian Island of an impressive drone show in the sky above the just-opened Greater Bay Area Art Center, highlighting Guangzhou’s cityscape ambitions.

Housing to drop to 16% of GDP