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China’s Economy Is Now In Free Fall

Chinese Economy
Chinese yuan banknotes are seen in this illustration picture taken April 25, 2022. REUTERS/Florence Lo/Illustration

China’s economy grew 0.4% in the just-completed second quarter, compared with the same period last year, according to the official National Bureau of Statistics.

According to almost everybody else, gross domestic product shrank in Q2. As Max Zenglein of the Mercator Institute for China Studies told the Washington Post before the announcement, “The government will not acknowledge a contraction.”

China’s economy not only contracted, but it is also heading for a free fall. Chinese leaders, for many reasons, cannot now stabilize the situation.

The Communist Party makes the case that trade will lift China toward the announced goal of “around 5.5%” growth for 2022. Two-way trade jumped 9.4% in the first half, year-on-year. Yet the economy is weak, something evident from the composition of trade. While exports skyrocketed 13.2%, imports, an indicator of domestic demand, increased only 4.8%.

In any event, overall growth is on a downward path. The economy, according to Beijing, grew 4.8% in the first quarter of this year.

Analysts blame COVID-19 lockdowns for Q2’s poor results. The draconian measures in the eastern part of the country—most notably in Shanghai and Beijing—dented consumer spending, of course, but the disease is still hitting the economy.

Chinese ruler Xi Jinping’s draconian “dynamic zero-COVID” policy is now shutting down neighborhoods across the country. Shanghai has been locking down areas and, there have been similar measures imposed in, for instance, Xian and Lanzhou. Xi, seeking an unprecedented third term as Party general secretary, obviously feels he cannot walk back from his economy-killing disease-control tactics.

There are, however, more fundamental problems. First, there is debt. To avoid the worst effects of the 2008 global downturn, Beijing went on a massive debt-fueled spending spree. Xi is beginning a new round of stimulus, but there is a limit as to what he can do.

Why? There is general concern about the total level of indebtedness. The country could have debt equal to about 350% of GDP. Moreover, there are new worries that China is running out of borrowing capacity.

China’s budget deficit at all levels of government widened to a record 5.1 trillion yuan ($758 billion) in the first half of the year according to Bloomberg calculations. That represents an increase of 610% over the same period last year.

Local governments, which rely heavily on land sales to keep the lights on, are extremely hard pressed. China’s fiscal revenue, even according to official figures, fell 10.2% in H1 2022 from the same period in 2020.

The property sector, accounting for perhaps as much as 30% of the Chinese economy, is in extreme distress. New home prices in 100 cities dropped by more than 40% in the first half of the year, compared with the first half of 2021.

In June, sales at the 100 largest property developers fell 43% from a year earlier. Big developers, triggered by the failure of the giant Evergrande Group, have been defaulting on debt, one after the other. For instance, Shanghai-based Shimao Group did not pay interest or principal on a US$1 billion bond this month. As CNN notes, the property sector “has been lurching from one crisis to another since 2020.”

At the moment, hundreds of thousands of buyers have halted mortgage payments on more than 200 unfinished projects across China. The mortgage boycott, as it is now called, has spread to about 80 cities. Prospective homeowners now believe that the apartments they have contracted to buy are unlikely to be completed by ailing developers.

“It certainly looks like it’s going to be endemic because people have been walking around Chinese cities looking at half-built, looming buildings that are empty, property after property, and saying to themselves, ‘Oh, in another five years this city is going to look like New York, or it’s going to look like London or Paris,’ or something like that,” said J Capital Research’s Anne Stevenson-Yang to John Batchelor, host of CBS Eye on the World, on Wednesday. “It may be that we’re at the point where the veils come off their eyes and they say, ‘Oh, damn, these are just empty buildings and nobody is doing anything.’ ”

Banks across China have been hit by the snowballing boycott. Some were in trouble even before the movement, not able to pay back deposits. At the beginning of this week, more than 3,000 depositors protested in Zhengzhou, the capital of Henan province, on the steps of the local branch of the People’s Bank of China, the central bank. There have been depositor demonstrations around China.

Chinese banks—and the Chinese banking system—are unlikely to withstand the troubles in the property sector. Even banks in Shanghai, the country’s financial capital, have had to limit withdrawals.

It is no wonder that foreign investors beginning in March, have been dumping Chinese bonds.

So far, China has been sustained by the inflows of equity investment, engineered by Wall Street cheerleaders like Ray Dalio of Bridgewater Associates and Larry Fink of BlackRock. Yet as Xi Jinping continues his assault on Chinese companies—he shocked markets by fining tech giants Alibaba and Tencent this week—inward equity flows will eventually reverse.

Xi believes in a state-dominated economy and has been steadily reversing the liberalizations sponsored by Deng Xiaoping, the successor to Mao Zedong. Xi, like Mao, has been closing off China to the world with, among other things, his self-sufficiency campaigns.

Periodically throughout Chinese history, rulers have sought to centralize control and isolate China from the outside. As Fei-Ling Wang of the Georgia Institute of Technology pointed out in The China Order: Centralia, World Empire, and the Nature of Chinese Power, such attempts result in disaster for China.

And that is the most fundamental reason why China’s economic problems are not merely a blip. The country is now led by an ideological leader who does not accept the modern world as it is.

The Chinese people are bound to pay the price. And not just last calendar quarter.

A 19FortyFive Contributing Editor, Gordon G. Chang is the author of The Coming Collapse of China and The Great U.S.-China Tech War. Follow him on Twitter @GordonGChang.

Written By

Gordon G. Chang is the author of The Great U.S.-China Tech War and Losing South Korea, booklets released by Encounter Books. His previous books are Nuclear Showdown: North Korea Takes On the World and The Coming Collapse of China, both from Random House. Chang lived and worked in China and Hong Kong for almost two decades, most recently in Shanghai, as Counsel to the American law firm Paul Weiss and earlier in Hong Kong as Partner in the international law firm Baker & McKenzie.



  1. cobo

    July 15, 2022 at 4:04 pm

    What an eye opener. If China is following its predilection toward isolation, that brings a question. Does Xi need to invade Taiwan to bolster patriotism and his popular support, or would he rattle the saber to distract while he takes China back into a separate reality? Or, is he just hardening the population for a bigger war with the West?

    • ai hong

      July 16, 2022 at 10:33 pm

      Gordon “has been” predicting disaster for decades ad it never happens. so this just means Gordon is a “has been”.

  2. Jim

    July 15, 2022 at 5:03 pm

    This suggests that if the U.S. insists on rectifying the “seven deadly sins” trade & direct relations issues identified by Peter Navarro and stops or limits direct investment in China… China will be weaker, maybe much weaker. (I understand the author, Mr. Chang, has long predicted that China would flat-out economically collapse.)

    This also suggests to me that America’s “One China” policy regarding Taiwan should be continued because “to Win without firing a shot” is the best policy.

    Put together China’s own failed policies and a correction of the “seven deadly sins” and China will be in no position to force their will on Taiwan. (As long as we don’t force their hand and make them engage in some rash action over an overt recognition that enrages their pride, they might just do something stupid and against their own interest. It wouldn’t be the first time a country did that.)

    Indeed, Mr. Chang’s prediction of “collapse by their own weight” might come true.

    Certainly, it appears China is having dire problems from self-determined policies.

    If that is on the horizon, and it may well be, then why get into a shooting war over Taiwan.

    Any War with China (for whatever reason) will be a World War considering it would be between the number one and two economies and both massive countries (geographically) with each side having their seconds lined up behind them.

    When somebody is digging a hole (as China seems to be), the number one rule is let them keep digging (don’t try and catch the falling knife).

    Although, I agree with Navarro, the “seven deadly sins” must be stopped, that is a matter of respecting our own sovereignty (not somebody else’s sovereignty) and not letting China abuse the American People and our economy.

    What was it, The Art of War which stated the best way to win a war is “without firing a shot.”

    If we play our cards right we just might achieve that.

    Precipitating a war with China over Taiwan is the wrong move. Frank Gaffney and Steve Bannon are 100% wrong to want to simply “brace for war” without trying to avoid a war, particularly when the other side may well collapse on their own… remember how we won the Cold War with the Soviet Union?

    In the end, we didn’t fire a shot… how wise was that?

    China hawks need to remember that.

    • Steven

      July 16, 2022 at 8:35 am

      Wow, epic post!

  3. Ghost Tomahawk

    July 15, 2022 at 5:11 pm

    And yall are worried about their military?? Their entire country is a house of cards in the path of a tornado. Adios China.

  4. James Wisdom

    July 15, 2022 at 6:55 pm

    ‘Let China Sleep, For When She Wakes, She Will Shake The World’
    Whether or not these words were spoken by Napoleon Bonaparte, in recent years, the Chinese Communist Party has created a very concerning reality to this statement.


  5. Neil Ross Hutchings

    July 15, 2022 at 8:51 pm

    I have focused on reading Ukraine related articles on this blog, but decided to read this article on China for a change of pace. I found it fascinating how this article and the comments mimic similar articles and comments that are predicting a collapse of the Russian army and government. Wishful thinking perhaps. Look how western economies ‘collapsed’ in 2008, and yet they are still with us today.

  6. pagar

    July 15, 2022 at 9:00 pm

    PRC’s economy now in a ‘free fall’ ? ? ?

    Wait till Biden’s US military starts stationing its hypersonic arsenal on china’s front doorstep.
    It’ll be a ‘free for all’.

    China needs to get rid of xi jinping and exile him to Canada, France or Germany.

    Xi has wasted trillions paying money to people like hunter Biden, corrupt people like Malaysia’s najib razak and shady rulers in Africa and south Pacific and investing in useless conglomerates like nameless companies in ukraine.

    Xi has bought or is buying hundreds of airplanes from Airbus while Chinese airline companies swim in a deep sea of red ink.

    Time for china to pull xi down from his high horse and kick him abroad.

  7. Ham Tarkinson

    July 16, 2022 at 2:44 am

    I read the entire thing and I said to myself, this is absolutely outlandish. Preposterous nonsense devoid of grounding in reality.
    So I get to the bottom and I read the part about contributing editor Gordon G Chang and I audibly laughed. Gordon Chang has been saying China is good nf to collapse any minute now for the past 20 years. If Gordon Chang said the sky was blue it would immediately turn green. His neutral state is wrong.
    Go Google his book.

    • Jim

      July 16, 2022 at 10:12 am

      You make a fair point.

      China makes a lot of money, but they also have a history of making investments that fail to provide a return on that investment.

      There are all kinds of “white elephant” projects in China, i.e., a number of “ghost cities.”

      China is also highly leveraged (maybe the point Mr. Chang is making). If the investments fail to make a return in that environment, it can create real problems.

      Multiply that situation and it effects the whole economy.

      To be aggressive, the U.S. needs to consider strategy which fosters failed returns on investment and drys up China’s sources of credit (that maybe hard to do).

      But direct confrontation is many times more dangerous, although more satisfying to the Warhawk mentality.

      • Ham Tarkinson

        July 16, 2022 at 12:17 pm

        But Pudong in ordos, one of the largest of these “ghost cities” now has a population close to a million people. Are they really ghost cities or are they build and fill cities? Look at Shanghai lujiazui. 5 years ago it was almost empty. Now it’s home to upwards of 2 million people.

        • Jim

          July 16, 2022 at 1:38 pm

          But are the “build & fill” cities profitable or do they fill them at a substantial loss?

          I don’t know the answer.

          Better to fill them at a loss than let the weeds & decay take them over for a total loss.

        • Ross

          July 17, 2022 at 3:33 pm

          China’s population is starting to decline and it is getting much older. They don’t have the security nets western societies have. So the burden of taking care of many of these older family members will fall on the family.

  8. Ham Tarkinson

    July 16, 2022 at 2:46 am

    I read the entire thing and I said to myself, this is absolutely outlandish. Preposterous nonsense devoid of grounding in reality.
    So I get to the bottom and I read the part about contributing editor Gordon G Chang and I audibly laughed. Gordon Chang has been saying China is going to collapse any minute now for the past 20 years. If Gordon Chang said the sky was blue it would immediately turn green. His neutral state is wrong.
    Go Google his book.

  9. Error403

    July 16, 2022 at 3:55 am

    Joe biden should get US courts to issue arrest warrant for xi jinping for exporting & selling opioids in US during trump’s term.Before he conks out. Totally.

    Biden’s mental and physical health is exactly like the china economy, in free fall, or at least in steep decline.

    Biden is regularly seen on tv, shuffling along his way, with a very unsteady gait, like china’s economy.

    Like china, biden is finished, kaput, won’t last until 2024.

  10. jexter

    July 16, 2022 at 3:55 am

    China is doing OK as long as Mr Chang still talking shyt about China.

    If China one day really collapse, then Mr Chang you will be running out of material to talk about.

  11. JR

    July 16, 2022 at 10:07 pm

    While I certainly hope some of this is true, it seems to me the stories about massive new cities standing empty and out of control debt have been floating around many years now. At least a decade. Of course the lock downs are relatively new, but it does seem the populace is amazingly docile about accepting the multitude of deprivations they bring. I do suppose one day China will trip and fall badly, but I have sincere doubts a loud crash is near.

  12. Mark Nickless

    July 17, 2022 at 4:57 pm

    “Periodically throughout Chinese history, rulers have sought to centralize control and isolate China from the outside….such attempts result in disaster for China.”

    I agree. Recently translated chapters of 三宝下西洋 reveal that Emperor Xuande attempted to exploit the rich iron deposits of the central United States in 1434. The attempt ended disastrously for all involved. In order to protect the “Mandate of Heaven” for the Ming, records of the failed expedition were burned or hidden and China withdrew from the world stage, leaving it to the technically inferior Europeans.

  13. gemstone

    July 17, 2022 at 9:34 pm

    Since property is such a large percentage of the Chinese economy, it is possible that a crash could tip China into a recession. Admittedly I read a seemingly cogent article dated 2014, which may have had a similar prediction for China. The big difference this time is the apparently unrealistic zero covid, policy of China, which is reducing the GDP growth. The strange and maybe unique aspect in China is that property is looked upon as an investment for old age and not a property to let out, which explains the number of empty properties.

    There is one thing that the purchase of properties as investment for old age fails to take account, is demographics. Everyone is aware of the one child policy, which has been relaxed. However the fact still remains that the population of China will shrink as do is not conducive to a receptive market for vacant property.

  14. Seknoth

    July 18, 2022 at 5:38 am

    Just another “China will collapse because I said so” article from Gordo. His next article will probably claim China will be sued into submission by the relatives of US mass shooting victims, for inventing gunpowder.

  15. leo lee

    July 19, 2022 at 2:59 am

    No. Wrong direction. Should let China close itself up and never let it open again. It is a can of viruses for the rest of the world.

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