China’s Wobbles Could Throw the Global Economy Off Its Axis
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China’s Wobbles Could Throw the Global Economy Off Its Axis

By DESMOND LACHMAN
Tue, Jan 30, 2024 9:03amGrey Clock 3 min

About the author: Desmond Lachman is a senior fellow at the American Enterprise Institute. He was previously a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.

Today, a Hong Kong court ordered the liquidation of Evergrande, a Chinese company that was one of the world’s largest property developers. After years of fruitless negotiations between the company and its creditors over the restructuring of its $300 billion debt mountain, a Chinese court said that “enough was enough.” In a blow to an already troubled Chinese housing market, it ordered that the company’s assets be liquidated to pay back its creditors.

How mainland China handles Hong Kong’s court order could have major implications for Chinese property prices and foreign investor confidence. If it enforces the court’s order, that could see an acceleration in Chinese home-price declines by adding to supply in an already glutted market. It could also heighten social tensions by disappointing around 1.5 million Chinese households who have put down large deposits for homes that are yet to be completed.

If it ignores the Hong Kong court’s order, it risks dealing a further blow to waning investor confidence. Questions would arise about China’s willingness to abide by the rule of law and to offer a safe economic environment for investors.

The Evergrande liquidation comes at an awkward time for the Chinese economy. It is already in deep trouble and could be headed for a Japanese-style lost economic decade. The news also suggests that China will disappoint the consensus view that the Chinese economy is headed for only a minor economic slowdown this year. This could have major implications for the U.S. and world economic outlook, considering that China is the world’s second-largest economy and until recently was its main engine of economic growth.

Even before Evergrande’s liquidation order, a whole set of indicators suggested that the former Chinese economic growth model was dead. Chinese home prices have been falling for more than a year; both wholesale and consumer prices have been falling; stock prices have plummeted as foreign investors have taken fright; and youth unemployment has risen to around 20%.

There have also been questions about President Xi Jinping’s economic stewardship. First, his disastrous zero-tolerance Covid policy contributed to the country’s slowest economic growth in 30 years. Now his increased economic intervention is undermining the underpinnings of the Chinese economic growth miracle unleashed by Deng Xiaoping’s economic reforms in the 1980s.

Chinese stocks rose last week on news that authorities are taking steps to stimulate the economy. But anyone thinking that the Chinese economy will respond favourably to yet another round of policy stimulus has not been paying attention to the size of that country’s housing and credit market bubble that has now burst. Nor have they been paying attention to the troubling degree to which that country’s economy has become unbalanced.

According to Harvard’s Ken Rogoff, the Chinese property market now accounts for almost 30% of that country’s GDP. That is around 50% more than that in most developed economies. Meanwhile, over the past decade Chinese credit to its non financial private sector expanded by 100% of GDP, according to the Bank for International Settlements. That is a larger rate of credit expansion than that which preceded Japan’s lost economic decade in the 1990s and that which preceded the 2008 bursting of the U.S. subprime and housing market.

The overall Chinese economy is highly unbalanced in the sense that it has become overly reliant on investment demand. The Chinese investment-to-GDP ratio is over 40%, according to the Organization for Economic Cooperation and Development. That’s sharply higher than the more normal 25% ratio in most other developed and mid-sized emerging market economies.

The consensus forecast is that Chinese economic growth this year will continue at a 5% clip. Anyone relying on that forecast should reflect on the many failures by the U.S. Federal Reserve and other central bankers to foresee the grave problems of the subprime housing market in the U.S. in early 2008. It would seem that most economists are downplaying indications of major Chinese economic problems that are plain sight. Chinese economic problems could unleash serious deflationary forces for the U.S. and global economy. The Federal Reserve would be ignoring them at its peril.

Guest commentaries like this one are written by authors outside the Barron’s and MarketWatch newsroom. They reflect the perspective and opinions of the authors.



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Hong Kong has taken a bold step to ease a real-estate slump, scrapping a series of property taxes in an effort to turn around a market that is often seen as a proxy for the city’s beleaguered economy.

The government has removed longstanding property taxes that were imposed on nonpermanent residents, those buying a second home, or people reselling a property within two years after buying, Financial Secretary Paul Chan said in his annual budget speech on Wednesday.

The move is an attempt to revive a property market that is still one of the most expensive in the world, but that has been badly shaken by social unrest, the fallout of the government’s strict approach to containing Covid-19 and the slowdown of China’s economy . Hong Kong’s high interest rates, which track U.S. rates due to its currency peg,  have increased the pressure .

The decision to ease the tax burden could encourage more buying from people in mainland China, who have been a driving force in Hong Kong’s property market for years. Chinese tycoons, squeezed by problems at home, have  in some cases become forced sellers  of Hong Kong real estate—dealing major damage to the luxury segment.

Hong Kong’s super luxury homes  have lost more than a quarter of their value  since the middle of 2022.

The additional taxes were introduced in a series of announcements starting in 2010, when the government was focused on cooling down soaring home prices that had made Hong Kong one of the world’s least affordable property markets. They are all in the form of stamp duty, a tax imposed on property sales.

“The relevant measures are no longer necessary amidst the current economic and market conditions,” Chan said.

The tax cuts will lead to more buying and support prices in the coming months, said Eddie Kwok, senior director of valuation and advisory services at CBRE Hong Kong, a property consultant. But in the longer term, the market will remain sensitive to the level of interest rates and developers may still need to lower their prices to attract demand thanks to a stockpile of new homes, he said.

Hong Kong’s authorities had already relaxed rules last year to help revive the market, allowing home buyers to pay less upfront when buying certain properties, and cutting by half the taxes for those buying a second property and for home purchases by foreigners. By the end of 2023, the price index for private homes reached a seven-year low, according to Hong Kong’s Rating and Valuation Department.

The city’s monetary authority relaxed mortgage rules further on Wednesday, allowing potential buyers to borrow more for homes valued at around $4 million.

The shares of Hong Kong’s property developers jumped after the announcement, defying a selloff in the wider market. New World Development , Sun Hung Kai Properties and Henderson Land Development were higher in afternoon trading, clawing back some of their losses from a slide in their stock prices this year.

The city’s budget deficit will widen to about $13 billion in the coming fiscal year, which starts on April 1. That is larger than expected, Chan said. Revenues from land sales and leases, an important source of government income, will fall to about $2.5 billion, about $8.4 billion lower than the original estimate and far lower than the previous year, according to Chan.

The sweeping property measures are part of broader plans by Hong Kong’s government to prop up the city amid competition from Singapore and elsewhere. Stringent pandemic controls and anxieties about Beijing’s political crackdown led to  an exodus of local residents and foreigners  from the Asian financial centre.

But tens of thousands of Chinese nationals have arrived in the past year, the result of Hong Kong  rolling out new visa rules aimed at luring talent in 2022.

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