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RUBY:

From Schwartz Media, I’m Ruby Jones. This is 7am.

A crisis that began in China’s housing market is now threatening to drag down the country’s entire economy.

If that happens, the repercussions will be felt across the globe, and nowhere more so than Australia - where our economy relies on what China buys from us.

So - just how unstable is the Chinese economy right now? And how did things change for the superpower once seen as an unstoppable economic force?

Today, National Correspondent for The Saturday Paper Mike Seccombe on the alarming signs in the Chinese economy, and what they could mean for us.

It’s Tuesday, August 30.

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RUBY:

Mike, there have been some recent signs that China's economy could be in trouble. We're seeing some unusual and even alarming things. And if that is the case, we could also be in trouble here in Australia as well, couldn’t we? Because our economy is now inextricably tied to China.

MIKE:

Well, that's exactly right. China is our biggest trading partner and selling minerals to China has been a huge part of Australia's economic growth over the past few decades and everything seemed to be going very smoothly for a long time because China's growth has been so strong and seemingly unstoppable.

Archival Tape -- Reporter

“The global economy is bogged down, obviously, in a deep recession, but there's one nation that has felt less pain than the others. China's economy grew 6.1% in the first quarter compared to a year ago.”

MIKE:

You know, it just grew and grew and grew.

Archival Tape -- Reporter:

“40 years ago, China's GDP hovered around only $150 billion annually. Nearly 20 years later, in 1997, it broke through the trillion dollar ceiling. And by last year, GDP had grown to over $12 trillion. China now swings a very heavy economic stick indeed…”

MIKE:

The bubble that never burst, people would say, you know, that every time it looked like China might be in economic trouble, it wasn't. And it saved us a couple of times too, including in the GFC.

Archival Tape -- Fran Kelly:

“Treasurer Wayne Swan has been driving the government’s efforts to stave off recession, the Treasurer joins us now at our Parliament House studio, good morning Treasurer….”

Archival Tape -- Swan:

“The good news for us is that in the middle of all this, it is the case that Asia has greater potential to grow. And we are ideally located to take advantage of what will surely be the Asian century.”

MIKE:

So that all seemed to be going smoothly...

Archival Tape -- House Speaker:

“The Honourable Prime Minister.”

Archival Tape -- Malcolm Turnbull:

“This is a deal that always had to be done. China is the world's single largest national market. It is absolutely critical for Australian jobs in the future. It's vital, our biggest export market.”

MIKE:

The main concern in recent years, of course, has been managing the politics of the relationship. You know, not necessarily considering whether the Chinese economy might tank, But when you take a close look at the Chinese economy, as I have been, there are things happening that we haven't seen before. And that point, I think, to real impending trouble.

RUBY:

Okay. And China's economy, it's very opaque. It's hard to get a real sense of how things are going because the statistics on growth are controlled to an extent by the Communist Party. So what is it that we're starting to see, Mike, that makes people think that things might be getting more unstable than we've seen in the past?

MIKE:

Well, the most obvious indicator, I guess, is the housing market and has been for a little while now. And it's pretty alarming, I have to say.

Archival Tape -- FT 1:

“The ratio of empty apartments in China could range between 10% and as high as 40 or even 50% in some small cities.”

Archival Tape -- FT 2:

“There are enough empty homes in China right now to house about 90 million people greater than the population of Germany or the UK.”

Archival Tape -- Spotlight on China:

“15 unfinished buildings were blown up within 45 seconds. Taiwan News said that the value of these structures is around 1 billion yuan, or 154 million dollars.”

Archival Tape -- Bill Birtles:

“Suppliers, investors and some employees have descended on Shenzhen at the headquarters of property giant Evergrande. All of them want their money back.”

Archival Tape -- CNBC:

“The company is so big that some say the fallout could have ripple effects beyond China.”

MIKE:

In the year to June, and these are the official statistics... So, this is coming out of the Chinese government. So, you know, they may even be massaged to make them look a little bit better. But in the year to June, the value of housing sales in China was 18% down on a year before, just a month later in July.

That fall had accelerated dramatically and it was 29% lower than it had been a year before. So the market's imploding and the origin of this real estate crash was a construction boom where developers just built millions and millions of houses and apartments, mostly apartments fuelled by cheap debt, on the expectation that demand for real estate would just continue to grow. And it hasn't.

And so now we've got to a situation where the construction of an estimated 13 million apartments has halted. Other estimates that I've seen have suggested that, you know, maybe enough dwellings to house 75 million people have not proceeded. And they're a huge economic vulnerability to China now because they represent debt. Both for the real estate developers and for the people who've bought into those apartments. The situation in China is that most people buy them essentially off-the-plan. So they take out a mortgage before the apartment is finished and often before it's even started. So we've got lots of people holding mortgages on homes that they can't move into, and they've now begun boycotting repayments to the banks on their loans. So the last I saw there was something like 300 projects worth a total of more than $300 billion that had joined the boycott. And, of course, suppliers to the developers have also stopped paying their debts because they haven't been paid by the developers. So there's this contagion that goes from the mortgage holders to the developers to the banks, the finance sector, and the broader economy. And this is a bit alarming.

RUBY:

Hmm. Okay. And this situation, these vulnerabilities in the Chinese economy, it's a big shift, isn't it? Because as you said earlier, China's growth has for a long time seemed inevitable. It seemed to be this unstoppable force. So where are the roots of all of this, this real estate bubble which is now crashing? How was it formed in the first place?

MIKE:

Well, ultimately, I suppose you could say the roots are in demographics because China for a long time had a one child policy. So this worked for the country for a while because it meant that they had a young workforce. But now that workforce is getting older and people are not having children to replace them. So the demographic projections are that by 2050, China could lose about 220 million workers. That's 20% of the workforce. You know, and at the same time those workers will be supporting more older people. So that's a huge problem.

But going to the immediate problem of the of the property and debt crisis, I guess you could take it back to about 2008 when there was the GFC and the Chinese government responded with just massive stimulus, you know, built a lot of infrastructure, local governments put a lot into infrastructure and housing in particular. And so this debt built up and up and around 2012 they realised they had a big debt problem, particularly at the local level, because local government entities just kept building cities and infrastructure and they never really fixed this problem because that would probably have induced a recession.

So, when they should have perhaps had a big slowdown back then, you know, in about 2015, China essentially decided that it would just go for growth and hope to grow its way out of it and not to worry about the debt. And as we’re now seeing that sort of delayed the inevitable.

RUBY:

Hmm. What is it, though, that's really brought this to a head now? Because we have seen debt building in many countries around the world for years and years. And that’s obviously been exacerbated by the pandemic and the associated lockdowns. So to what extent has this been caused by China’s unique response to Covid-19?

MIKE:

Well, you're right. The proximate cause of the crisis is of course Covid, and in particular the Chinese government's response to Covid, which is a zero-Covid strategy, which has meant shutting down whole cities, which of course, has caused massive disruption to the economy.

And this, I might say, presents a challenge quite unlike anything the country's faced before, and they're still going into lockdowns now. So it's quite a different problem. In the GFC, as I mentioned, for example, the Government embarked on massive stimulus to get things going. But with Covid, it's actually been shutting activity down.

So, the problem’s quite different, as is the structure of the Chinese economy. The services sector is now by far the largest part of the economy, and that's the sector that's been hit hardest by the Covid lockdowns. And the government has responded by cutting interest rates, particularly on mortgages. But as someone said to me, you can cut interest rates all you like, but it's not going to help much if households don't want to borrow because they're concerned about their short-term outlook, they're concerned that their house won't be worth as much once they've bought it, etc..

And, cutting interest rates isn't going if their restaurant's been shut down, for example, because of lockdowns. So that's a big problem.

And the government also can't really spend big stimulating the economy in the way that it has before, because there's so much debt already. Public and private debt in China now is as much as 300% of GDP, according to the IMF, and that's almost 50% higher than the global average. So, you know, while you're right to say, debt’s a problem elsewhere in the world. It's a bigger problem in China.

And the really dangerous thing here is that the solutions the Communist Party has used to get out of economic trouble in the past just don't look like they will work this time.

RUBY:

We’ll be back in a moment

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RUBY:

Mike, the wisdom for a long time has been that China's economy won't fail, that their debt bubble won't burst because the Chinese government wouldn't allow that to happen, because the central Government, it owns the financial system and controls it. So does that assumption still hold? And what is the Chinese Communist Party doing now? Does it seem like they're in crisis mode?

MIKE:

Well, well, it does. I mean, I think the interest rate reductions, I mean, two lots in I think it was two weeks speak to a degree of panic.

Anyway, going to the central government. The party leadership meets every year at this time in the lead up to the Congress, which is happening later in the year. And it's quite hard to determine, you know, what course the leadership is looking at taking. You know, it's a bit like reading tea leaves, if you like. But the suggestion seems to be that the local authorities are now being asked to ease up on the restrictions, the Covid restrictions, and to put economic development at the forefront, get things restarted again as quickly as possible. Whether they succeed, of course, is another matter. I mean, the mindset now for a long time has been to shut everything down. And getting it open again is a bit like, you know, turning an ocean liner as one academic expert put it to me, it takes time. But there are other complications facing China, too, at the moment. The one that's probably being most acutely felt is climate and the environment.

RUBY:

Hmm. Okay. So tell me more about that, Mike. How is China feeling the effects of the climate crisis and how is that complicating the picture when it comes to managing what's happening in their economy?

MIKE:

Well, just like much of the northern hemisphere, you know, Europe, the western states of the United States, China has suffered just unprecedented heat and drought this year.

Archival Tape -- CNN Extreme Heat Measures:

“This is China's strongest and longest heatwave on record lasting for more than 60 days, pushing temperatures above 110 degrees Fahrenheit in some regions.”

MIKE:

Rivers are literally drying up, including reportedly parts of the Yangtze.

Archival Tape -- CNN Extreme Heat Measures:

“Droughts are sweeping across the country. Parts of China's longest river, the Yangtze and other reservoirs have completely dried up…”

MIKE:

You know, one of the great rivers of the world, a major artery for moving people and particularly goods. And this has had a significant impact on agriculture and, of course, on the transportation of goods. But perhaps more importantly, it's resulted in power shortages because a lot of China's power comes from hydro, about 20% of it. And there just hasn't been enough water to run the hydro plants. So as a result there have been shortages and major manufacturers had to curtail their operations.

So there are a lot of problems coalescing at the same time here. You know, demographics, climate, the housing crisis to a certain extent, the authoritarian nature of the current leadership, Xi Jinping’s leadership. And those problems will not be contained in China and there will be implications for global growth.

RUBY:

There's no doubt about that. And there's also no doubt that Australia is likely to feel that more acutely than other places if China's economy suffers. What does that mean for us? Given that China is our largest export partner.

MIKE:

Well, what happens next, I guess, depends on how quickly China resumes normal operations and particularly what happens with its Covid lockdown. So short answer: who knows? So far, though, Australia has not suffered significantly from China's economic problems. We're still selling them lots of commodities. And we're getting very good prices for those commodities. And it may even prove to be a record year. We'll certainly go close to it. But the knock-on effect could be quite severe if things don't change in a hurry. Because, we depend so heavily on China for our exports. And if their economy is slowing down, so is the demand for our exports pretty simply.

So, you know, when I've looked at some of the academic work that's been done on this by experts, they suggest that into the future, Chinese economic growth is not going to be nearly as strong as we've been used to, you know, probably 2 to 3% at 2050. Say some of the less bullish people others say could manage five, but certainly won't be anything like the double digit growth we've been used to. So long term, definitely there will be a declining market there.

In the immediate term as to this crisis. Well, a downturn could begin sooner rather than later. I mean, just this week, the Australian Financial Review was reporting a forecast by the Commonwealth Bank that there would be a 40% fall in prices for those key Australian commodity prices between March this year and March next year. So that's a big whack off of our export income. And of course, you know, that may prove to be wrong. China may bounce back quicker than we expect. But the longer term picture for China and therefore us, you know, unless we diversify, is not looking particularly rosy.

RUBY:

And Mike, it's interesting hearing you talk about this, too, to think perhaps maybe we've been focusing on the wrong thing when it comes to China, because there is so much talk around about what happens if China invades Taiwan. And obviously that's something that we do need to think about. But perhaps the more realistic and immediate question that we should be considering is what happens if China's economy contracts?

MIKE:

Well, you're exactly right. And it's been pointed out to me that, you know, for all the sabre-rattling, China and Taiwan are still trading every bit as enthusiastically as they ever have. And Taiwan is still the biggest investor in China and and still one of the only two countries in the world, along with Australia, that enjoys a significant surplus in it in its two-way trade with China.

So I probably can't do any better than quote Professor James Laurenceson, who's the the director of the Australia-China Relations Institute at the University of Technology in Sydney, he called it geopolitical angst that we've seen in Western capitals. He said it was quite somewhat overwrought. And he makes exactly your point that we've focused so much on armed conflict, the potential for armed conflict in the Taiwan Strait, but a much higher probability as a negative event involving China, affecting as Australia, is an economic one. And, you know, we could be on the cusp of that right now.

RUBY:

Mike, thanks so much for speaking to me. It's been great.

MIKE:

Thank you. It has.

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Also in the news today...

Labor passed 100 days in government on Monday. Prime Minister Anthony Albanese marking the occasion with an address to the National Press Club.

Archival Tape -- Albanese:

“Our government is only 100 days into this journey, but we are resolved on the destination of a better future.”
In his speech the Prime Minister reiterated his commitment to a referendum on an Indigenous Voice to Parliament.

And...

Historically devastating floods are affecting the lives of 30 million people in Pakistan. Pakistan’s Minister for Climate Change has called for aid to assist with ongoing deadly flooding.

She called the situation a “climate-induced humanitarian disaster”.

More than 100 people were killed over the weekend, according to Pakistani officials, taking the death toll since mid-June past one thousand.

I’m Ruby Jones, this is 7 am. See you tomorrow.

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