With Wars in The Headlines, Let’s Not Forget About China’s Defaults

While headlines are dominated by Israel and Ukraine, there are serious problems brewing in China.

That’s nothing new. China’s economy was squashed by COVID in 2020-2022. When the ridiculous Zero Covid policy was ended in November 2022, Wall Street invented the equally ridiculous “reopening” narrative that said fresh consumer demand and economic stimulus would result in an economic boom in China.

We said that was false at the time both because so-called stimulus doesn’t really work (in China or the U.S.), and the Chinese economy was already weak before COVID so the passing of COVID would simply mean a return to Chinese slow growth at best. We’ve seen the weak growth and the discrediting of the reopening narrative. Now, conditions are getting even worse.

Real estate is by far the biggest sector of Chinese consumer savings and investment. China was already in trouble with the collapse of Evergrande, the biggest property developer in China. Now comes the collapse of Country Garden, also one of the biggest developers and creditors in the Chinese real estate sector.

As reported in this article, Country Garden is admitting it might default on almost $11 billion of offshore dollar-denominated debt, much of it held by U.S. investors in emerging markets funds in their 401(k)s. This default on external debt comes on top of Country Garden’s default on internal obligations, including down payments by homebuyers and securities held by Chinese consumers.

Country Garden and Evergrande are not the only real estate developer collapses. Many other less well-known firms have crashed also. And the rot in the Chinese economy is not limited to real estate. Orders for manufactured goods are declining and China’s trade deficit is shrinking.

This is not the end of China, but it is the end of the myth that the Chinese economy is a juggernaut that will soon overtake the U.S. Based on all the economic evidence combined with demographic trends and other factors, not only will China not overtake the U.S. soon – it may not happen ever.

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