House of cards: Decline of the Chinese Economy
- Ayaan Blah
- Apr 24, 2024
- 2 min read
China’s growth from one of the poorest countries to the world’s second-largest economy is nothing short of miraculous, contributing to why China is the economic powerhouse for foreign investment it is today. However, recent events have revealed cracks in its economic foundation. Over the last 4 years, it has experienced economic deflation (when the price of goods in an economy decreases → consumer unwillingness to spend money), hit a decades low in foreign investment, and more that leaves China in a difficult financial situation.
A major contributor to this downturn is China’s property bubble, which once accounted for a large chunk of its GDP (Gross Domestic product).
The real estate market had been highly inflated because of unsafe predictions about return on investment → the sector was seen as the safest investment for financial growth, therefore too many people began to invest in real estate. As a result, 90% of new homes were purchased before they had been built. This led to trading in houses that didn’t really exist — because property developers never really had the money to build those many houses, thus forcing them to take a lot of debt.
However, new regulations in 2020, which aimed at decreasing real estate prices, began to limit property developers’ ability to raise debt. This acted counterproductively and made the situation worse. Many of China’s real estate giants like Evergrande and Country Garden already had a lot of debt, thus faced economic turmoil, leading to debt defaults and unfinished housing projects that consumers already paid for.
This crisis severely eroded consumer confidence in China, resulting in reluctance to spend, a housing price crash contributing to deflation. Due to China’s economic vulnerabilities, in part stemming from this mismanagement in the housing industry, foreign investors are now exploring alternative markets such as India and Bangladesh significantly more.
By Ayaan Blah
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