If my professor from last semester is to be believed (and I tend to think he is- if a bit wishfully), this is only the start of a very, very long road down. Beyond the empty real estate people tend to focus on, China has generated an immense amount of excess industrial capacity, which has avoided collapse so far only because the government (both in Beijing and at the local level) has been propping them up, mostly by encouraging banks to roll over their loans in addition to direct subsidy (which, among other things, has left local governments deeply indebted).
Between that
and the real estate issue, which has been largely driven by local governments seeking to generate revenue from industrial and commercial land leases- borrowing heavily to pay for the infrastructure needed to attract buyers- the result is that commercial banks and local governments alike have massive debt problems. Now the number of non-performing loans is rising, over 10% in the last quarter according to
official numbers. All this while Xi's high-level "anti-corruption" campaign is increasingly paralysing the administrative organs of the state: perhaps the worst possible time for that to occur. Officials don't know what is going to happen to their superiors, or what now constitutes inappropriate activity, and are choosing to play it safe- by doing nothing. None of this means that there's going to be some horrific crash, but it's no surprise the markets are jittery.
The sole upside of this is that it may ease that subsidy-induced glut of Chinese industrial capacity, which has wreaked havoc on manufacturing sectors the world over. A steel industry that produces 60% of global output, and is now seeking to offload its excess capacity overseas, has more or less cannibalised that of every other country. Overcapacity in their shipbuilding industry has caused prices to more than halve (spotty construction, however, means many will have to be replaced in a few years- thankfully). Tires, cement, paper- it's clear that Chinese overcapacity is preventing manufacturing growth essentially anywhere else except at the very low end, to say nothing of the kind of heavy industry you
really need for development. A correction that wipes out this overcapacity- if still decidedly a net negative for the global economy- will be one with a
very significant silver lining.
