Anchor’s Coffee Table Economics note by Casey Sprake will be distributed intermittently. It is a collection of Casey’s opinions on key economic factors and events shaping markets globally and in South Africa (SA). It is essentially Casey’s thoughts and perspectives on the multiple dynamics at play in the global and local economies.
Executive summary
In this week’s edition, we highlight the following:
- China’s crisis-hit property market offered a lifeline: To alleviate its current property crisis, China’s government has pledged US$42bn in various measures to support its struggling property sector. These steps represent Beijing’s latest attempt to tackle issues in the massive real estate market. However, China’s economic weakness is becoming more of a structural story rather than simply a property sector-driven cyclical downturn that bottomed out in 2023. The question then is, what would it take for China to continue growing at the Chinese authorities’ desired rate?
- BRICS burst: The economic rocket fuel outpacing the G7 giants. The rise of BRICS nations signifies a global economic power balance shift. As these countries grow, their influence in international economic and political affairs is expected to increase.
- Navigating the dragon’s debt: China’s global debt-trap strategy. China’s debt-trap strategy represents a complex interplay of development finance and geopolitical manoeuvring. While China’s loans under its Belt and Road Initiative (BRI) have undeniably spurred infrastructure development in many countries (China has provided developing countries with over US$1trn in committed funding through the BRI), these loans also carry significant risks of debt distress and loss of sovereignty.
China’s crisis-hit property market offered a lifeline:
Chinese authorities have announced their most significant measures yet to combat the ongoing crisis in that country’s property sector. The property crisis, which has profoundly impacted the world’s second-largest economy, stems from the sector’s previous role as a significant growth driver. The property sector turmoil began in 2021 with the default of Evergrande Group, a situation exacerbated by overbuilding and new Chinese regulations limiting corporate debt. The crisis has since expanded beyond Evergrande, affecting other major developers such as Country Garden, Kaisa Group, Fantasia Holdings, Sunac, Sinic Holdings, and Modern Land. Since introducing debt-limiting measures in 2021, numerous large property developers have defaulted on their debts. In January, a Hong Kong court ordered that Evergrande, the world’s most indebted property developer with US$300bn-plus of total liabilities, be liquidated.
To alleviate the crisis, China has pledged US$42bn in various measures to support its struggling property sector. The steps announced on 17 May represent Beijing’s latest attempt to tackle issues in the country’s massive real estate market. Among these measures, the People’s Bank of China (PBOC) will provide CNY300bn (c. US$42.3bn) to financial institutions to lend to local state-owned enterprises (SOEs), enabling them to purchase unsold, completed apartments. Additionally, the PBOC has removed the floor on mortgage interest rates and lowered the minimum down payment ratio for first- and second-time home buyers. This support is expected to unlock CNY500bn in financing for such purchases, which SOEs could convert into affordable housing. Real estate companies can then use the funds from these sales to complete other apartment projects. For unfinished, pre-sold properties, the National Financial Regulatory Administration (NFRA) announced that commercial banks have provided CNY935bn (c. US$131.9bn) in loans to complete construction on whitelisted projects since the programme’s launch in January. Essentially, the government’s purchase of housing inventory injects liquidity into developments, giving developers more resources to complete housing projects. Simply put, the government has stepped in as the buyer of last resort.
Despite the recent array of measures, it is crucial to recognise that resolving China’s real estate problems will take time. Currently, SOEs and local governments are primarily responsible for implementing these policies, but their resources may be too limited to make a significant impact at a macro level. Among the challenges these measures face include local governments having constrained fiscal resources, thus limiting their purchasing capacity. This constraint could lead to rent-seeking behaviour (i.e., attempting to increase your wealth without creating new value) and moral hazard (where the probable severity or frequency of loss increases due to it being insured) in deciding which properties to buy. Unless potential home buyers perceive a significant upward shift in housing prices, the current prices will thus remain too high relative to household incomes and rent yields. For years, many apartments in China have been sold before construction was completed. However, delays in delivering finished apartments have increased over recent years as developers face financing difficulties. At the current sales pace, it will take over two years to clear the existing stock of new homes, according to a Caixin Global report in March, citing a local research firm. This is nearly double the historical average of 12 to 14 months.
The bottom line
Overall, China’s growth is slowing in the face of cyclical and structural headwinds. In the near term, continued spillover from the COVID-19 pandemic, a deep contraction in China’s real estate sector (which in recent decades has driven the country’s high growth rate, accounting for c. 20% of activity according to the International Monetary Fund [IMF]), and weaker global growth are leading to significant drags on growth. Concurrently, a secular decline in productivity growth and demographic headwinds (amid geoeconomic fragmentation pressures) weigh China’s medium-term growth prospects. Thus, China’s economic weakness is becoming more of a structural story rather than simply a property sector-driven cyclical downturn that bottomed out in 2023.
The question then arises: What would it take for China to continue growing at the Chinese authorities’ desired rate? Policy insiders expect Beijing to maintain a similar growth target of c. 5% this year, but that may be a tall order even with the additional stimulus measures. Looking further ahead, for China to continue to maintain growth rates of 4% to 5% p.a., the choice for Chinese authorities is relatively stark – to look past the shallow policy surface of economic rebalancing instituted through base effects and the usual forced investment stimulus and to pursue genuine and sustainable economic rebalancing. Given the current state of China’s economic affairs, pumping up economic growth through investment stimulus and maintaining rapid credit growth is becoming less and less effective as China’s economy matures.
BRICS burst: The economic rocket fuel outpacing the G7 giants
The global economic landscape has been undergoing significant shifts, particularly with the rise of emerging economies. Among these, the BRICS nations (formerly Brazil, Russia, India, China, and SA, now also including Iran, Egypt, Ethiopia, and the United Aran Emirates [UAE]) have demonstrated remarkable growth trajectories compared to the G7 countries (Canada, France, Germany, Italy, Japan, the UK, and the US). Over the past two decades, BRICS countries have consistently outpaced G7 nations in terms of GDP growth rates. According to the IMF, from 2000 to 2020, the average annual GDP growth rate for BRICS countries was approximately 6%, compared to c. 2% for the G7 nations. This disparity highlights the rapid economic development and industrialisation within the BRICS economies. BRICS nations, particularly India and China, benefit from large, young populations, which provide a substantial workforce and potential for domestic consumption growth. This demographic dividend fuels economic expansion and innovation. As a result, rapid urbanisation in BRICS countries has led to significant investments in infrastructure, housing, and transportation. This urban growth spurs economic activity and attracts foreign direct investment (FDI). Furthermore, many BRICS nations possess vast natural resources, including oil, gas, and minerals, contributing significantly to their GDP. Exporting these resources to global markets provides a steady revenue stream and supports economic stability. In comparison, while G7 countries are characterised by advanced economies with high GDP per capita, their growth rates have been comparatively sluggish. With ageing populations, G7 nations face demographic challenges, leading to higher dependency ratios and increased pressure on social welfare systems. As such, high market saturation levels and slower population growth in G7 countries limit the potential for rapid economic expansion. Moreover, as developed economies, G7 countries experience lower marginal returns on new investments, contributing to slower growth rates.
Nonetheless, the IMF’s latest economic growth projections for major nations are mixed, with most G7 and BRICS countries expected to experience slower growth in 2024 compared to 2023. Only three BRICS-invited or member countries—Saudi Arabia, the UAE, and SA—are projected to record higher real GDP growth rates in 2024 than last year. China and India are forecast to maintain relatively high growth rates of 4.6% and 6.8%, respectively, in 2024. Still, these figures represent a slowdown from last year, with China growing 0.6 ppts slower and India one-ppt slower. Conversely, four G7 nations are set to grow faster than in 2023, including Germany, which is recovering from negative real GDP growth of 0.3% YoY in 2023.
Despite mostly lower growth forecasts for 2024 vs 2023, BRICS nations still have a significantly higher average growth forecast of 3.6% compared to the G7’s average of 1%. While the combined GDP of G7 countries is around US$15trn greater than that of BRICS nations, the continued higher growth rates and potential for new members position BRICS to overtake the G7 in terms of economic size within two decades. We note that BRICS’ recent expansion has encountered some obstacles, as Argentina’s newly elected President Javier Milei declined its invitation, while Saudi Arabia has clarified that it is still considering the invitation and has not yet joined BRICS. Despite these initial challenges, as of February 2024, 34 countries have submitted applications to join the growing BRICS bloc. Any changes to the group’s members are likely to be announced leading up to, or at, the 2024 BRICS summit, which will take place in Kazan, Russia, from 22-24 October.
The bottom line
The rise of BRICS nations signifies a global economic power balance shift. As these countries grow, their influence in international economic and political affairs is expected to increase. While BRICS countries have leveraged their demographic advantages, natural resources, and economic reforms to achieve rapid growth, they must address internal challenges to sustain this momentum. The ongoing rise of BRICS nations will have profound implications for global trade, investment, and geopolitical dynamics, marking a significant realignment of economic power in the twenty-first century.
Navigating the dragon’s debt: China’s global debt-trap strategy
In recent years, China’s BRI has emerged as one of the most ambitious infrastructure and economic development programmes in history. Stretching across Asia, Africa, Europe, and beyond, the BRI has seen China providing significant loans to developing countries for infrastructure projects. While these investments have the potential to spur economic growth and development, they have also given rise to concerns about a so-called “debt trap.” The BRI aims to enhance global trade routes and economic connectivity through extensive infrastructure projects – at least according to the official line from Chinese authorities. These include roads, railways, ports, and energy projects. China finances these projects through loans to participating countries, often provided by state-owned banks. These Chinese loans are typically characterised by their size and terms – loans are usually large to fund massive infrastructure projects (i.e., high principal amounts). While some loans are concessional, many come with interest rates higher than those offered by multilateral institutions like the World Bank. Moreover, some loans are secured against key national assets, which can be seized in the case of a default. As such, critics argue that these loans are often given on terms that may not be sustainable for the borrowing countries, leading to a situation where these nations struggle to repay their debts. This can result in a loss of sovereignty and control over key assets.
One of the most cited examples of the debt trap is Sri Lanka’s Hambantota Port. In 2007, Sri Lanka took substantial loans from China to build the port. However, the project failed to generate the expected revenue, and by 2017, Sri Lanka could not service the debt. Consequently, Sri Lanka leased the port to a Chinese company for 99 years, raising concerns about sovereignty and control over national assets. Across Africa, Chinese investments have funded critical infrastructure projects. For example, Ethiopia’s railway linking Addis Ababa to Djibouti has significantly improved trade logistics. However, the high debt levels have led to fears of economic vulnerability. Zambia, for example, has faced significant debt distress partly due to its Chinese borrowings, raising alarms about potential asset seizures and economic dependency.
The primary concern with the debt trap is the potential loss of sovereignty. When countries cannot repay their loans, they may have to cede control over strategic assets to Chinese entities, as seen in Sri Lanka. This can undermine national sovereignty and give China substantial leverage over indebted nations. China’s debt-trap strategy is perceived as a tool for expanding its geopolitical influence. By holding significant economic leverage, China can secure political and economic concessions that align with its strategic interests, potentially shifting the global balance of power. For the borrowing countries, the debt trap can lead to significant economic risks. High debt levels can strain national budgets, limit fiscal flexibility, and increase vulnerability to economic shocks. This can hinder long-term economic development and stability.
Critics argue that China’s lending practices are predatory and designed to trap countries into unsustainable debt, thereby increasing China’s influence. They contend that the lack of transparency and the high interest rates of these loans exacerbate the financial vulnerability of borrowing nations. However, defenders of China’s BRI and lending practices highlight the infrastructure and development benefits. They argue that these projects fill critical infrastructure gaps and promote economic growth. Furthermore, some suggest that the debt-trap narrative is exaggerated and politically motivated, with many projects providing tangible benefits despite the financial challenges.
The bottom line
China’s debt-trap strategy represents a complex interplay of development finance and geopolitical manoeuvring. While China’s loans under the BRI have undeniably spurred infrastructure development in many countries (China has provided developing countries with over US$1trn in committed funding through the BRI), these loans also carry significant risks of debt distress and loss of sovereignty. The global debate continues, with proponents praising the developmental gains and critics warning of the strategic implications. As the BRI expands, the challenge for participating countries will be to navigate the financial opportunities and risks, ensuring that the dragon’s debt does not ensnare their economic futures.
