Megan Greene, a senior fellow at Brown University and chief global economist at Kroll, published an article on September 6, pointing out several factors that wreak havoc on China’s economy, already battered by a stringent zero-COVID policy and property crisis.

According to Greene, China suffers greatly from three devastating Ds: debt, disease, and drought. 

As “China remains heavily integrated into the global supply chain and is a potential driver of global demand,” Greene believes that if the world’s policymakers and investors do not carefully consider these three Ds, it would likely lead to a new global economic downturn.

The report noted that China’s economy has gone from bad to worse and is not showing any sign of a potential future rebound anytime soon.

Data from the Chinese statistics bureau in July show that manufacturing contracted to 49% from 50.2% in June. All retail sales, industrial production, and investment declined and missed analysts’ expectations.

In addition, China’s youth unemployment in July also jumped to nearly 20%, accelerating from a 19.3% surge in June. Both China and Hong Kong stock exchanges saw record outflows of portfolio investments.

Bloomberg reported that economists have further cut their previous China’s growth forecasts this year from 3.9% to 3.5%. This is compared with a 6% annual growth rate in 2020.

Regarding China’s first D (debt), Green believes it mostly comes from the property crisis. This sector accounts for about a third of the country’s GDP, 70% of Chinese household wealth, 60% of local government revenue, and 40% of bank loans.

According to the report, more than 30 real estate firms have defaulted on international debt, house prices have declined for 11 months, and homebuyers across China have stopped paying mortgages for unfinished projects.

Apollo News reported that Chinese developers are 14 months behind completion deadlines on average. Among the projects targeted by the mortgage payment boycott, only 32% of them have missed the deadline. 

This figure shows that Chinese households have lost confidence in the property market and thus prefer piling up savings instead. As a result, developers of presold projects, which account for 86% of the property market, would likely see a 30% drop in sales this year. 

As of the end of July, the number of unfinished buildings was at least 821,000, with a 30% down payment. This amounted to about $106 billion (735 billion yuan), or around 2% of China’s total mortgages.

This is just part of the unfinished projects. If the worst scenario happened, with all homebuyers refusing to pay mortgages, the loan figure could become as high as $330 billion (2.3 trillion yuan), or 6% of total mortgages in the country.

Greene thinks that the CCP’s efforts to shore up the property market, including interest rate cuts and higher infrastructure spending, would not help much as China is stuck in a liquidity trap. This means that banks are forced to lend while demand for loans has dropped due to lower interest rates.

Another factor that is also severely hampering the world’s second-largest economy is disease. 

Despite the COVID-19 pandemic spreading throughout 31 provinces, the CCP still sticks with its draconian zero-COVID policy. As a result, Morgan Stanley reported that Shenzhen and Chengdu , which make up 13% of China’s GDP, are under lockdown in the latest wave. 

Green said real estate developments and infrastructure investment could not be completed or boosted when a city is shut down. The continuous lockdowns would also undermine Chinese citizens’ willingness to spend and businesses’ desires to borrow.

Last but not least is drought. 

China’s worst heat wave on record and accompanying drought have brought the Yangtze River, Asia’s longest river that feeds massive hydropower plants in China, to its lowest level since record-keeping began in 1865.

As nearly 90% of China’s electricity supply comes from hydropower, the receding water level of the Yangtze river has severely impacted power generation at many key hydroelectric stations, causing an energy crunch in different parts across China.

Power rationing forced many factories to curtail production, resulting in further disruptions in the domestic and global supply chain.The extensive drought has also significantly impacted China’s food supply as the six affected areas this year contributed to around 50% of the country’s rice production in 2021.

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