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ANGE:

From Schwartz Media, I’m Ange McCormack. This is 7am.

China’s economy is in deep trouble, and continues to get worse.

For the world’s second biggest economy and the most powerful neighbour in our region, the looming crisis could have massive consequences for Australia.

So, how did a country known for pulling millions of people out of poverty go so wrong?

Today, national correspondent for The Saturday Paper Mike Seccombe on China’s financial woes - and the impact it will have on our own economy.

It’s Wednesday August 30.

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ANGE:

Mike, can you paint a picture of the situation in China right now? What's life like there?

MIKE:

Well, the interesting thing is that the problems in China are almost the exact opposite of what's happening in Australia and much of the rest of the world.

For example, we don't have enough housing. They've got an oversupply.

Audio excerpt -- Reporter 1:

“By some estimates there is enough empty property in the country to house over 90 million people.”

MIKE:

Which is made worse by the fact that the Chinese population has begun to shrink, whereas ours is growing very rapidly.

Audio excerpt -- Reporter 2:

“The one child policy may have averted unsustainable population growth, but decades down the line its clear one problem has been replaced by another.”

MIKE:

In Australia rents are soaring, in China they're falling and Chinese landlords are essentially not getting enough return on their rents to pay the loans that they've incurred to buy the places. Our main economic problem is inflation. Their main economic problem is deflation.

And when you look at the Chinese labour market, you know, in this country, there's a lot of talk from economists and policymakers, rightly or wrongly, that Australia's labour market is too strong, and that's putting upward pressure on inflation. Chinese labour market is tanking.

Audio excerpt -- Reporter 3:

“Youth unemployment in China is at a record high, with one in five young people in Chinese cities out of work…”

MIKE:

Official statistics show that youth unemployment hit a record 21.3% in June. And I might say, I've seen unofficial data that suggests it could be as much as twice that. And I think a real sign of just how bad that situation is, is that the Chinese response to it was to try and hide it. They promptly announced they would stop publishing separate figures for youth unemployment. So clearly they're in a big mess and they know it.

ANGE:

Yeah. And everything we've heard about China in the past few decades is about its power and its growth. So how did such a rich and powerful country end up in this mess?

MIKE:

Well, there's a number of factors, but at the heart of the crisis is China's property sector. Which for decades has been the key engine for economic growth. Whenever things got tough, they built more stuff.

Audio excerpt -- Reporter 4:

“...The slow motion collapse of the world’s most indebted property developer has just entered a new stage. The embattled company has filed for bankruptcy protection in the US…”

MIKE:

Just this month, Evergrande, which is one of China's property giants, and is indebted to the tune of well over 300 billion US dollars, filed for bankruptcy in the United States. It looks like another one even bigger. I think Country Garden is actually the biggest property developer in China. It seems to be heading the same way. People expect that it will collapse. Its workers are going unpaid. A lot of its projects have just stopped. And that story's repeated among scores and scores of developers all across the country.

Audio excerpt -- Reporter 5:

“.....investors are starting to fear that we could be seeing another major debt crisis in the already very troubled Chinese real estate market.”

MIKE:

So the property sector in particular is interesting. The way it operates is almost like a Ponzi scheme. What happens is if you're a developer, you say, I'm going to, you know, build a big apartment block and you sell those apartments before you've even built it. And then you use that money to move on to your next project and you use that as collateral for future loans. So it goes round and round.

The problem with that, as with Ponzi schemes, is that they stop once you stop getting new people to join. And in the case of the Chinese property sector, what's happened is that there are a lot of people now who are left owning accommodation that doesn't exist or are worth far less than they paid for it.

Audio excerpt -- Reporter 6:

“This has been her home for the past 6 months. She bought this apartment off plan three years ago. But the property developer went into financial difficulty, and construction on the project stopped.”

MIKE:

And on the developer side, a lot of developers are left with buildings they can't sell and debt that they can't service.

But it's not just the property sector. It's much broader than that. It's the fact that with this philosophy of every time you're in trouble, you build more stuff, that involves large amounts of debt. And it's got to the point now where the debt is just crushing.

And also there are just millions of young people who are graduating from university every year. Children of the one child policy whose parents have worked hard to set them up for well-paying jobs. But the jobs that are available, to the extent that there are jobs, are blue collar, working class jobs, not the white collar tech jobs that they've been told to aim for. So where we are now is just a far cry from the decades of phenomenal growth, which was the prevailing story of China for the past 40 years.

ANGE:

Yeah, and I'm wondering how China's President Xi Jinping, is handling the situation and I guess how responsible he is for what's happening.

MIKE:

Well, he and the party are, I think, significantly responsible.

Xi Jinping came to power in 2012, and at that time, the Chinese economy had been open to the world for just over 30 years. It was booming. Its economy was growing by around 10% or more year on year on average.

Since his ascension, though, things have been pretty bumpy. There's been no more double digit growth. There's been a couple of major economic setbacks, notably in 2015 when there was a big stock market crash, which was pretty scary.

And the government's response, of course, to each of these setbacks was the same as the one I've already enumerated - build lots more stuff, particularly apartments.

But the other thing that I think came out of that crash was it fired suspicion among Xi and the party of the markets, of free markets. It made them less inclined towards the previous model of sort of, you know, capitalism with a Chinese face.

And at the same time, of course, Xi saw what was happening in America and elsewhere with tech giants, you know, like Twitter and Facebook amassing huge amounts of power, twitter booted President Trump off, for example. You know, and Facebook played clearly a role in deciding the outcome of the Trump election. So I think you can say that Xi and the party have become increasingly wary of particularly American style capitalism.

Recently we've seen them cracking down on big private companies, particularly tech firms, in an effort to bring them to heel.

It's fair to say, I think, that foreign investors are increasingly wary of getting into China.

Foreign direct investment in China for the most recent quarter was down 87% compared with the same period a year ago.

On top of this Xi was responsible for the very hardline Chinese response to COVID. And it really hasn't recovered from those years of harsh lockdowns.

The other thing of note, I think here is that China hasn't pulled the trigger on any of the sort of stimulus package that we've seen in the past this time around. They're not building a bunch of new buildings or roads and so on. In large part it just reflects the fact that China can't afford this kind of stimulus anymore because it's being crushed by the massive debts that it incurred as a result of all that past investment in construction and so on, which, of course, is not good news for Australia's own economic future.

ANGE:

So, what will this mean for Australia? That’s after the break.

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ANGE:

Mike, Australia has had close economic ties to China for a really long time now, but can you give me a sense of how much Australia's economy depends on China?

MIKE:

Well, let me put it this way. Whenever Australia has appeared to be stuck in the economic mud, China has been the tractor that pulled us out. Back in 2009-10, for instance, when most of the world fell into recession after the GFC, Australia escaped and much of the credit for Australia avoiding recession should go to China. China embarked on an absolutely enormous stimulus package. It dwarfed Australia, it dwarfed every other nation’s, really. It was something like $590 billion US - three times as much as America put in to its stimulus to try and get out of the GFC. And once again, China used that money to essentially build its way out of trouble.

All those airports, railroads, massive amounts of property were, of course, built with Australian commodities. So the resources boom in this country was enormous.

They helped pull us out of that big crisis. But unfortunately, it's looking very unlikely that that Chinese tractor is going to be around to pull us out of the economic mire this time, which is very worrying considering that, you know, Australia, like much of the world, you know, is skating the edge of recession.

ANGE:

Seeing as we do rely on China a lot economically, how will Australia be impacted by this?

MIKE:

Well, first point is China is the number one trading partner of, I don't know, more than 100 countries. So what happens in China inevitably has wide consequences. And in times of slow economic growth, China has not only helped Australia out, it's actually driven a lot of growth in the world economy.

So what will happen for Australia? Well. People see things like tourism, for example, will suffer because Chinese people simply don't have the discretionary income at the moment to travel. We may also see fewer Chinese students. And, you know, our tertiary education sector, of course, is a very big part of our economy these days. And of course, the big one is that if they're building less infrastructure, they're going to need lots less of our resources exports, you know, particularly iron and the coal used to turn that iron into steel.

ANGE:

Yeah. And if China doesn't provide that economic benefit to Australia that they have for the last few decades, how do you think that will affect our approach to relations with China more broadly?

MIKE:

Well business, as I mentioned, is already becoming wary of dealing with China. You know, I was talking to one leader of one of the business peak bodies who was saying that one of their people are just been to China and they were shocked they couldn't use their Australian issued credit card in China because China is gradually disengaging itself from the sort of global financial architecture, they found themselves being surveilled wherever they went. And I think that that's a general perception among Australian investors. So, you know, investment will start going elsewhere, particularly Vietnam, possibly India, although the famous Indian bureaucracy appears to be something of a hurdle there. I mean, the thing was China just made it easy for years and it's not making it easy anymore. So, you know, I think we will increasingly be disengaged in a business sense from China.

ANGE:

And, Mike, if living conditions in China continue to get worse, what type of political fallout are we likely to see there?

MIKE:

Well, there's been this sort of compact in China, I think you would say, between the government and the people, whereby the people accept or at least tolerate, a high level of surveillance, censorship, etc, on the understanding that this level of control brings an increased standard of living.

But clearly, that compact is breaking down.

Like I said, 22% youth unemployment, unofficial estimates, maybe twice that.

Marriage rates have halved in less than a decade. People aren't having babies. Wages are flatlining. So, you know, if you come out of your education expecting a good job and go straight onto the unemployment line, if you can't afford to marry or have babies, you know what happens?

I remember Tiananmen Square, you know, the democracy protests that were so brutally put down by China a couple of decades ago. And although the Chinese government has done its best to make the Chinese people forget, you can bet they remember. And I think they have some reason to be worried about what could be the consequences for China's social cohesion if this becomes a permanent change to the way the Chinese economy works.

ANGE:

Mike, thanks so much for your time today.

MIKE:

And thank you for yours.

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ANGE:

Also in the news today,

Outgoing ACT Director of Public Prosecutions, Shane Drumgold, is taking legal action against the inquiry into Bruce Lehrmann’s prosecution.

The inquiry – which examined accusations from police and prosecutors about conduct during Lehrmann’s rape trial – made several findings of misconduct against Drumgold.

His case is set to be heard in the ACT supreme court on September 14.

And

Outgoing QANTAS CEO Alan Joyce has faced questioning about the airline’s performance and profits… at a senate committee hearing into the cost of living.

Joyce was accused of misleading the public over the value of unused flight credits… after Jetstar CEO Steph Tully confirmed Jetstar owes 100 million dollars worth of credits, on top of the 370 million Qantas owes its customers.

I’m Ange McCormack, this is 7am. We’ll be back again tomorrow.

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