11:00 JST, February 24, 2023
Since the beginning of its third term, the administration of Chinese President Xi Jinping has been ratcheting up external tensions. Given space limitations, this article will refrain from commenting on that issue, and instead focus on major economic and social woes facing China.
The foremost event that has been adversely affecting the Chinese economy is its real estate sector crisis. It became known in 2021 that property giant China Evergrande Group’s financial situation was so dire that it was deemed incapable of rehabilitating itself. The Chinese government unveiled a rescue package to keep the company afloat. Nevertheless, some of Evergrande’s peers were found to be in financial distress as well. Therefore, the government devised a series of measures for the crisis-hit property sector as a whole in November 2022. However, it is not necessarily clear yet how effective the measures have been. Concern remains over the future of the sector.
In January this year, Evergrande said a global accounting firm had resigned as its auditor. The resignation — which was said to have stemmed from disagreements over matters pertaining to the audit of the property developer’s accounts — overshadows the future of China’s embattled real estate sector.
Should China be unsuccessful in resolving the real estate crisis, two serious problems will occur.
Banks, provinces teetering
First, the crisis will evolve into a widespread problem for those Chinese banks, especially regional ones, that have outstanding possible non-performing loans to property developers.
At large-scale banks in China, loans to the real estate sector account for a relatively small portion of their overall lending portfolios. This means that their financial base is considered unlikely to be deeply eroded even if the worst happens regarding the banking sector’s exposure to the property development sector.
In contrast, at many of China’s regional banks, loans to real estate developers constitute a greater portion of their overall lending balances. Still, they have managed to keep marketplace trust in them intact thanks to the Chinese method of assessing asset impairments that tends to log lower non-performing loan levels than in Japan. But there remains concern that they would be forced to rush sometime in the future to dispose of bad loans once and for all.
The second problem is the constraint on Chinese provincial governments’ sources of fiscal revenue. In China, the central and provincial governments were earlier involved in a fierce tug of war for many years over tax base retention and tax collection authority. Ultimately, the Tax Sharing System was introduced in 1994, allowing the central government in Beijing to acquire much of the tax base.
Deprived of what is comparable to Japan’s resident tax as their mainstay source of fiscal revenue, China’s provincial governments had no choice but to rely heavily on proceeds from sales of land use rights. For this reason, provincial governments eager to increase their incomes by capitalizing on property market growth, and the real estate sector ambitious to bolster the property market further, found themselves in the same boat. Against this background, there was a sharp surge in large-scale property development projects involving various areas of China. But that meant an excess supply of housing with swaths of land eventually left unoccupied and called “guicheng,” meaning “ghost towns.”
In other words, provincial governments’ scheme to shore up their fiscal revenue backfired, making real estate businesses lackluster, badly shrinking property market activity and finally compelling provincial governments to face a fiscal crunch.
As China substantially preserves the characteristics of a planned economy, public funds play a huge role in implementing a large variety of economic policies. In this regard, it is necessary to pay attention to the fact that an increasing number of provincial governments in China find themselves unable to make money readily available on their own whenever necessary.
The other woe in China that should be pointed out alongside the real estate crisis is the advance in the declining birth rate and aging population.
In China, provincial governments are responsible for pension operations. In reality, a considerable number of provinces have been faced with shortfalls in their accumulated pension fund balances — reserves for future pension benefit payments. Debate on how to make up for the fund shortages is ongoing.
What is worse, there is growing concern in China about insufficient reserves of public pension funds. For example, the accumulated balance of China’s Basic Pension Insurance for Urban Employees (BPIUE) — the core of the country’s old-age pension system — is projected to be exhausted in 2035 and the BPIUE’s deficits thereafter would have to be entirely financed by central government subsidies. There is worry whether the employee pension plans will be sustained in a situation where the Chinese economy is slowing.
While Japan is at the forefront of efforts to overcome the issue of the aging of the population, China is burdened with a more serious problem called “weifu xianlao,” or growing old before getting rich.
In addition to old-age pension insurance, China’s shrinking birth rate and the aging population are causing intense stress on the fundamental strength of its social and economic fabric. Its working-age population has already been on a slump and its overall population dropped in 2022 for the first time in 61 years, making it more probable that India will overtake China as the world’s most populous country.
What is most to blame for China’s population contraction was the “one-child policy” that had been imposed from 1979 to 2015. However, even the government’s new policy of allowing couples to have three children has so far done little to halt the decline in newborns. In fact, China’s births in 2022 were below 10 million for the first time since the establishment of the People’s Republic of China in 1949, while its crude birth rate — the annual number of live births — last year hit the lowest since its founding.
Employment ice age
Under such circumstances, a meaningful response in economic terms is to secure sufficient personnel available for engaging in production.
For its part, Japan as an advanced economy with an aging population adopted a twin policy of facilitating women’s social participation and raising the mandatory retirement age.
China’s current mandatory retirement age, in principle, for men is 60, while that for women is either 50 for blue-collar employees or 55 for white-collar employees. The Chinese government is in the process of raising the retirement age in a phased manner under a five-year plan through 2025 with provincial governments tasked with actual implementation.
But the plan for raising the retirement age has reportedly faced persistent opposition from the public.
In China, too, increased support for childbirth and childcare is necessary as a measure to keep its birth rate from declining. However, due to insufficient public financial and institutional support, many elderly couples, having already retired, take care of their grandchildren. Opponents of the prolonged retirement age say such family-based care for children would be in jeopardy as those in the grandparental cohort are now required to spend more years at work.
To make matters worse, competition is already intensifying between old and young people over employment opportunities, with the latter finding it extremely difficult to obtain jobs.
In December last year, according to the National Bureau of Statistics of China, the unemployment rate among young people ages 16-24 stood at 16.7%, far above the average urban jobless rate of 5.5%. Meanwhile, China’s Education Ministry said the country had a record 10.76 million university graduates — including those from higher vocational colleges — in 2022, up 1.67 million from 2021 and exceeding 10 million for the first time. Last year’s pre-graduation informal job offer rate for them has reportedly been so low that they were said to be undergoing an “employment ice age” or an “employment hell.”
The severe job market conditions in turn have led to an increase in the number of young people in China feeling increasingly resigned to find “work wherever available.” Behind this phenomenon is growing discontent among young people over the change in the labor market landscape, where senior workers reaching the traditional workplace age limit do not retire because of the retirement age extension.
When those in the younger generation were children, the now-abandoned one-child policy was in place, enabling each of them to benefit from the so-called “six pockets, one mouth” surroundings with two parents and four grandparents pouring their incomes on one child. Those children are now grown up only to feel scared of the reality — each has “six mouths to be fed” on his or her own. This awful situation apparently makes many of them disheartened, distancing themselves from the competition for fewer employment opportunities.
In China, new graduate school enrollments have recently tended to rise. Meanwhile, the number of people in China looking for opportunities to study abroad with the ultimate goal of securing jobs at foreign companies reached about 800,000 in 2022. China has many people with overseas university experience called “haigui” or “sea turtles,” which has the same pronunciation as “overseas returnees.” Overall, however, its labor market is faced with a stagnation in the supply of talented young people.
From my experience contacting or negotiating with its officials, I think highly of the Chinese government’s competence in policy planning and implementation. However, its posture of late appears to be too biased toward political considerations. After sticking to zero-COVID anti-pandemic restrictions, it abruptly announced that more than 80% of its population, namely 1.1 billion, had been infected with the novel coronavirus. This was a case of providing inaccurate information. I am concerned that these developments have led to a decline in the Chinese government’s competence.
Watanabe is president of the Tokyo-based Institute for International Monetary Affairs. Previously, he has served as vice finance minister for international affairs and governor and chief executive officer of the Japan Bank for International Cooperation.
The original article in Japanese appeared in the Feb. 19 issue of The Yomiuri Shimbun.