China’s growth is declining as the real estate crisis (and other financial hurdles) worsen the country’s economy.
The last week of July saw a sudden worsening in China’s real estate market crisis. Simultaneously, the United States released a swath of positive economic data, increasing optimism in Western stock exchanges.
But first, let’s start with some numbers:
- The S&P 500, the Dow Jones, and the Nasdaq Composite closed very well at +1.92%, +1.01%, and +2.38% respectively,
- Despite increased uncertainty surrounding future interest rate hikes, European markets also performed very well. Frankfurt ended the week at +0.53%, London at +1.79%, and Milan at +0.80%,
- The Tokyo Nikkei was the only major Asian stock exchange to grow this week, ending at +0.28%,
- China, on the other hand, saw a serious drop with Hong Kong falling by -0.74% and Shanghai by -2.67%.
Evergrande and other Chinese crises
After China’s largest real estate developer Evergrande filed for bankruptcy, the entire sector plunged into crisis. The housing market represents 30% of China’s GDP and 70% of household capital.
Evergrande declared default in 2021 and the Chinese government attempted a controlled debt restructuring ever since. The strategy, however, failed as Evergrande’s debt kept mounting with assets not turning into liquidity fast enough.
Country Garden, the developer that replaced Evergrande as China’s biggest, is also on the brink of default. After missing two deadlines, some of Country Garden’s bond obligations will expire in early September.
The real estate crisis is just one of the many financial hurdles China faces. The country is also battling with economic deflation, decreased exports, weak economic demand, and a fierce trade war against the United States.
These factors could lead China to end its unprecedented period of economic growth.
US economy sails ahead
On the other side of the Pacific, the United States experienced better-than-expected economic growth. Despite high interest rates and increasing inflation, consumer spending went up during the summer, signaling increased economic activity.
Consumer spending increased by 0.8% in August, exceeding market expectations.
This data will be crucial for the Federal Reserve’s upcoming September decision. Since March 2022, the Fed kept increasing interest rates in order to cool inflation down. So far, interest rates have gone up 525 basis points in the fastest monetary tightening in the Fed’s history.
The only pause to this unprecedented hawkish period was in June 2023, when the Fed temporarily paused interest rate hikes. The Fed’s hands were tied by a looming banking crisis and financially pressured businesses.
But, as increasingly more economic data paints a good financial picture, the Fed might decide to keep raising rates. After all, inflation slowly increased in July to 3.2%, showing an unstable decline in consumer prices.
