China’s Economic—and Social—Contract Is Fraying
Chinese households’ confidence in Beijing’s policies has been shattered
By Nathaniel Taplin
In China, another major developer is apparently teetering and the economy is flirting with outright deflation. PHOTO: TINGSHU WANG/REUTERSThe economic news out of China this summer has been, in a word, grim.
But the headline figures, as bad as they are, may be hinting at a more fundamental issue: Beijing has failed to convince households that their financial future is secure in the post-Covid era.
The country’s main July data, released Tuesday, paint a picture of an economy close to stalling out.
Growth in retail sales slowed to 2.5% from a year earlier—with headline consumer inflation already negative.
Industry barely grew at all: 0.1% from the prior month in seasonally adjusted terms.
And banks extended the smallest amount of new loans, on net, since 2009.
Beijing has responded by cutting two key policy rates—and announcing it will no longer publish youth unemployment data, which was running in the neighborhood of 20%.
After a seemingly promising start to the year, how did things get so bad again, so fast?
There is plenty of ugly news to choose from: exports are falling, foreign investment is drying up and the overall job market is weakening again.
But perhaps the most compelling explanation is this: Households have suffered an enormous, and possibly permanent, loss of confidence in both their future income prospects and the safety and value of their main financial asset, housing.
And in both cases, Beijing’s recent policies deserve much of the blame, which may be one reason economic data has suddenly become so sensitive.
A little history helps here.
Commentary on China’s economic miracle often focuses on state-owned enterprise reform.
But the privatization of the nation’s housing stock in the ’80s, ’90s and early 2000s, which was among the largest transfers of wealth to households in history, was arguably as important.
It gave families a modicum of real financial security and a source of capital to invest in new businesses—just as the space for the private sector in China was opening up wide.
Ever since then housing has functioned, for many families, as a combination of retirement plan, insurance policy and stock portfolio.
Endlessly rising housing prices—and wealth—have been a headache for young buyers and a driver of indebtedness, but also helped paper over gaps in the social safety net for middle-aged savers.
Beijing’s ruthless squeeze on developer financing, the defaults of mega-developer Evergrande and the long, deep housing downturn that followed—with many families hung out to dry waiting for prepurchased apartments that might never be built—was therefore a visceral gut punch for many, if not most, households.
And it came at a time when the services sector, the main source of good jobs, was already flagging thanks to Beijing’s draconian “zero-Covid” policies and the crackdown on the internet tech and education sectors.
The U.S. produces more corn than any other crop and American farms sold $5.3 billion of it to China last year.
For a rough analogy in American terms, imagine that during the Covid-19 lockdowns in 2020, Washington had also decided to radically cut future Social Security and Medicare benefits—while simultaneously launching a regulatory assault on Silicon Valley, one of the remaining sources of good jobs growth.
Households have responded by boycotting the housing market, and paying down debt, on a scale that appears to be unprecedented in recent Chinese history.
The stock of individual residential mortgage loans in China fell outright in both the fourth quarter of 2022 and second quarter of 2023—something that didn’t even happen during the much steeper property price downturn in late 2014 and early 2015.
Developers sold 60.3 million square feet of residential property in July—which was the least in any given month since 2012, according to figures from data provider CEIC.
Meanwhile, after a very brief post-Covid bounce, households are focused on precautionary saving again.
About 58% of respondents to the central bank’s urban depositors survey indicated a preference for boosting savings deposits in the second quarter, slightly down from December 2022’s 62% but up close to 15 percentage points since mid-2019.
Only 24.5% were inclined to boost consumption.
Now, with another major developer—Country Garden—apparently teetering and the economy flirting with outright deflation, it seems clear that the time to flex the central government’s balance sheet has arrived.
A big consumption stimulus would be one way to begin convincing households that the government has their interests—rather than, primarily, grandiose industrial policy and geopolitics—at heart again.
Much stiffer support for developers will be politically unpalatable but probably necessary, too.
One approach that might be easier to swallow would be an expanded, publicly financed “slum redevelopment” program of the sort employed to bail out developers in 2016.
Otherwise, if Beijing fails to prove to households that it is still capable of forceful, practical action in their interest, China may be in for a painful period of economic stagnation—and eventually, perhaps political instability too.
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