China's economy is in deep trouble!

China, the world's second-largest economy, currently grapples with some serious economic challenges. 

Here’s what’s happening in China.

China's economic performance isn't matching the economists' expectations. Large Brokerages have downgraded growth expectations, despite early signs of improvement after the COVID-19 pandemic. Unfortunately, this growth hasn't lived up to expectations.

China's economy has slipped into deflation. In July, the Consumer Price Index (CPI) dropped by 0.3 percent, after staying flat the previous month.

Also, in June, youth unemployment skyrocketed to a record 21.3 percent, leaving one in five young people without jobs.
To make matters worse, China's exports plunged by 14.5 percent in July compared to the same time last year. This marks the sharpest drop since the chaos caused by COVID-19 in February 2020.

So, what's behind China's economic downturn?

Two main factors are at play:

1. Low consumption leading to deflation

People in China aren't spending their money like before. Why?

Due to China’s zero covid policy and its persistent lockdowns businesses had to stop and start , which made folks unsure about the future. Even when things got better, people didn't go on big shopping sprees because they feared another lockdown.

So, they saved their money instead of spending it which lead to a record bank deposits of 133 trillion yuan. 

This made prices of things drop, and even though that might sound good, if it keeps happening, it can lead to a big money mess and even a recession. To fix this,, the government is doing all it can to encourage people to spend more, including lowering interest rates.

2.The real estate bubble fueled by debt:

In the late '90s, the Chinese government allowed developers to lease state-owned land. This sparked a real estate frenzy, driven by high demand as more people wanted property as a symbol of success. Loans were easy to come by, causing housing prices to soar. But here's the problem – speculators joined the game. They bought properties hoping to sell them at higher prices later, creating a cycle of borrowing and building. 

By 2020, the government stepped in to limit how much developers could borrow from banks due to mounting debt. This set off a chain reaction – developers struggled to finish projects, started defaulting on loans, and left projects incomplete. A significant portion of new home sales relies on "pre-sales" for unfinished homes, which was disrupted by developers' financial issues. This led homebuyers to reconsider mortgages and their real estate plans, and then the pandemic hit.

A major shock came when Evergrande, China's biggest developer, failed to repay a staggering $300 billion debt in 2021. Other players like Country Garden Holdings missed bond interest payments, and Zhongrong International Trust, a major financial player, also missed investment repayments, causing concerns about a financial crisis.

The property market contributes more than 30%  to the economy of China and the panic in the real estate market led to a full blown financial crisis in the country. Real estate crisis and Persistent lockdowns strangled China’s economy. Some experts even suggest that investors might need to adjust to slower growth, with a few even mentioning the possibility of Japan-like stagnation.