75% Collapse: This Really Could Be The End For China | Chinese Economy | EU-China Trade | NZ

Happy Wednesday everybody. Welcome to another episode of China Update where we discuss leading political, economic and geo-strategic analysis on the world's number two economy. My name is Tony, we normally take Wednesdays off, but there is so much to cover that we have to put out this extra episode today. These first two developments especially are important to note, so let's jump in. And first up, according to a shocking new report published by Goldman Sachs this week, China's demand for new homes in urban areas is expected to remain sharply subdued in the an incredible 75% below its 2017 peak due to demographic headwinds and fading confidence in property values, something we explored in yesterday's video. The US Investment Bank projects that annual demand for new urban residential units will hover just under 5 million units, a steep drop from the 20 million units seen at the height of China's housing boom. Many would call it a bubble. Analysts cited a shrinking population, slowing urbanization and declining home price expectations as key drivers for the long term slowdown, quote, falling population and slowing urbanization suggest decreasing demographic demand for housing, end quote. Goldman Sachs economists wrote, adding that, quote, investment demand in China could turn negative as owners sell vacant apartments, end quote. This outlook compounds the challenges facing China's beleaguered real estate sector, which has been under pressure from mounting debt, oversupply and waning investor confidence. While Beijing has rolled out a series of stimulus measures, including a US$1.5 trillion fund to support the housing market, the latest data show new home prices dropped in May at the fastest pace in seven months, suggesting limited impact from early policy moves. We covered this in yesterday's video, and we also discussed that US$20 trillion of household wealth has been destroyed by the depreciation in housing asset values alone. Goldman Sachs economists estimate that annual demographic housing demand will fall to an average of 4.1 million units between 2025 and 2030, down from 9.4 million units annually in the 2010s. They also warn that with price expectations falling, holders of investment properties are more likely to offload assets, exerting further downward pressure on the market. This is particularly important. Many folks in tier one and tier two cities bought investment properties during the boom years in the lower tier cities. This is one of the reasons why the overcapacity, the oversupply issue is so acute in the poorer parts of the country, very parts of the country that can ill afford to have these issues as they are also facing the most acute local fiscal challenges, something we've been following very closely on China Update in recent years. Now these findings from the Goldman Sachs report underscore what this channel and others have been arguing for years now. This is not a cyclical downturn, rather a much more painful structural downturn. That means it's the end for the property sector as a source of growth. It cannot recover. It can only find a new normal. That means China will have to find another source of growth, one it has not been able to do for many years now, and with trade more vulnerable by the day. If it cannot, it just means, in the short to medium term at least, surging debt, then an end to growth. Beacon University professor of finance Michael Pettis put the implications of all this into stark reality, the long-term risks to economic growth and financial stability from this property demand collapse, observing today, quote, property investment used to account for roughly a third of all investment in China, which itself accounts for 43 percent of Chinese GDP versus 25 percent in the world on average and 30 to 34 percent among high-investing countries, end quote. And there is more bad news for China. Tensions between the European Union and China over trade appear to have reached a breaking point. At the recent G7 summit in Canada, European Commission President Ersta von der Leyen opened her remarks with a direct condemnation of China's economic practices, particularly its control over rare earth exports and the destabilizing effects of industrial overcapacity on global markets. Von der Leyen's tone left little room for ambiguity. She accused Beijing of abusing its developing country status at the World Trade Organization and undermining global manufacturing through intellectual property violations and heavy subsidies. Quote, this is not market competition. It is distortion with intent, end quote, she said. She warned of a, quote, new China shock, end quote, as Chinese firms unable to absorb overproduction at home flood international markets with subsidized goods. In a further escalation, she accused China of weaponizing its near monopoly on critical raw materials, including rare earth magnets, calling it a threat to both economic and national security interests. Behind the scenes, frustrations are boiling over. According to the U.K.-based Financial Times, the EU has refused to hold a key preparatory economic dialogue with China ahead of the annual EU-China Leaders' Summit, citing lack of progress on a raft of unresolved trade issues. The high-level economic and trade dialogue has traditionally laid the groundwork for summit agreements, and skipping it signals that Brussels no longer sees the value in technocratic engagements without tangible results. The diplomatic optics are also deteriorating. Despite the summit being held in Beijing to mark the 50th anniversary of bilateral relations, General Secretary Xi Jinping is not expected to attend. Instead, Premier Li Jiang, the country's second-ranking official, officially at least, will represent China. For many in Brussels, this is seen as a snub, especially given the EU's symbolic decision to travel to China for the occasion, breaking from precedent. Adding to the tension is China's growing grip over critical supply chains. China's recent restrictions on the export of rare earth minerals, essential to technologies ranging from electric vehicles to defense systems, have rattled European and Japanese manufacturers alike. Japanese business leaders, in particular, are pressing Beijing to streamline licensing procedures, citing inconsistent paperwork and regional disparities in enforcement. While some licenses have been granted, many companies remain mired in red tape. Meanwhile, China is pushing ahead with its own industrial expansion. The launch of the Anji Soundness, the world's largest methanol-ready car carrier, marks a new phase in China's global manufacturing ambitions. Capable of carrying 9,500 vehicles, the ship is now en route to Europe with the cargo of Chinese automobiles and construction machinery. The vessel symbolizes both the scale of China's industrial prowess and the challenge facing European manufacturers who feel increasingly undercut. While there is still room for dialogue, von der Leyen's sharp words at the G7, including her tacit alignment with US President Donald Trump on what they call the China threat, suggest a significant hardening of EU policy. Brussels may not be closing the door on Beijing entirely, but it is now openly questioning the benefits of the current economic relationship. Without major concessions from China, the EU's strategic patience is running out, and a long-standing pillar of global economic engagement may be fracturing. Like I said, these are two big developments we needed to cover. If you're getting some value from this extra episode of China Update, it's a big help if you can just hit that like button and share this with someone who you think will also get some value from it. If you haven't already, subscribing is a big help and it will mean that you're on top of this most up-to-date analysis on China as it's released. Patreon and Buy Me A Coffee links are also in the description below. I think it's also worth taking this opportunity to speak on the topic of thumbnails and titles once again. This is something that I bring up every few months, especially for new viewers. Unfortunately, YouTube requires that have provocative thumbnails to meet minimum click-through rates. If this rate is not met, channels are heavily penalized. Indeed, late last year, I did an experiment using provocative thumbnails versus more plain or sober thumbnails to reflect the sobriety of China Update coverage within the videos themselves. The results were unambiguous. The provocative thumbnails outperformed, with the plain thumbnails resulting in YouTube simply not showing the videos to anyone. In some cases, the reduction in views could be as high as 90%. The decision was then made and explained to the audience that the channel would adopt a more provocative thumbnail slash title approach, but my guarantee, my promise, has always been and will always be, the content itself, the videos themselves, will always remain sober and grounded no matter what happens. I ask for your understanding and appreciation for this situation with regards to the thumbnails. I do everything myself on this channel except the thumbnails. The thumbnails actually come from a third-party designer. I have vetoed some that I think are just too over the top, but really, it is them designing them. I've continued to do sporadic tests, provocative versus plain thumbnails in the last few months, and the results are the same. Like I said, the videos themselves will always remain grounded and sober. Thank you, everybody, for the ongoing appreciation of the situation, understanding, and support. Now, with that said, let's move into part three of today's video. New Zealand Prime Minister Christopher Luxon is in China this week for his first official visit to the country. Aiming to strengthen economic ties while navigating an increasingly complex geopolitical landscape, the four-day trip, which began on Tuesday, yesterday, and which includes meetings with General Secretary Xi Jinping and Premier Li Tsiang in Beijing, underscores the dual priorities of expanding trade and tourism while addressing rising security concerns in the Pacific. As a quick aside, we can see that the General Secretary is willing to meet with the Prime Minister of a small and relatively unimportant country, but it seems as unwilling to meet with the leaders of the European Union. We continue with this development, however. Luxon, who assumed office in November of 2023, emphasized the economic goals of the visit in a social media post before departure, saying the mission is, quote, part of our plan to grow our economy, creating more jobs, lifting wages, and putting more money in your back pocket, end quote. China is New Zealand's largest goods trading partner, with exports totaling $20.85 billion in 2024, including $17.75 billion in goods such as dairy, meat, and wood, and $3.1 billion in services. Tourism and education also play key roles in the relationship, although Chinese tourist arrivals remain about 20% below pre-pandemic levels. They still rank as the third largest group of international visitors to New Zealand. To support tourism recovery, New Zealand recently announced a one-year visa waiver trial beginning in November for Chinese passport holders arriving from Australia with valid visas, reciprocating China's visa-free policy for New Zealanders launched in 2023. The bilateral relationship is under strain. China's growing military activity in the Pacific, including a recent People's Liberation Army Navy task force entering the Tasman Sea, has heightened strategic unease in Wellington. The unease was compounded earlier this year when the Cook Islands, within New Zealand's constitutional realm, signed economic and mining cooperation pacts with Beijing without consulting Wellington in breach of the constitutional requirements of the relationship. I was in New Zealand at the time, and that story in particular occupied the national news for several days. Quote, there are a whole bunch of issues and challenges in the relationship, end quote, said Jason Young, director of the New Zealand Contemporary China Research Centre based in Wellington, speaking on New Zealand radio outlet Newstalk ZB this week, noting that while economic ties are vital, strategic trust is lacking. The New Zealand Academic Express quote, I mean, it's a very complicated relationship in the sense that New Zealanders on all the surveys have very low trust that China will do the right thing in world affairs. It's down to about 14% of people think that they will, and there's also an aversion to the authoritarian political system in China. But at the same time, it's seen as very important because it's the largest economy in Asia, about half of the GDP in Asia, and it's an important trade partner, which is important to New Zealand's interests. And I think that's just the reality of the situation. End quote. Indeed, recent public sentiment data echo that caution. A new Asia New Zealand Foundation survey found that New Zealanders who see China as a threat rose from 28% to 40% between December and March, a period coinciding with China's naval exercises in the Tasman. Despite these tensions, Luxin has described China as a quote, vital part in quote of New Zealand's economic story, and emphasise the need for open dialogue on quote, issues that matter to New Zealand, end quote, including defence and security. Wellington has historically pursued a more moderate stance on Beijing compared to partners like Australia, which due to its location has more pressing security considerations than New Zealand. But that approach is evolving in light of growing regional contestation. Luxin's visit follows a 2023 trip to Beijing by then Prime Minister Chris Hipkins and comes just months after Chinese Premier Li Jiang visited New Zealand, signalling ongoing high-level engagement amid growing strategic complexity. Okay, that is today's episode of China Update. Thank you so much everybody for watching. Have a good Wednesday, I will try to take tomorrow off, so I'll either see you tomorrow or more likely on Friday.