Concerns are growing about the Chinese economy after major property developer Country Garden failed to pay the latest instalment of interest on a $500mn note due in 2025. This comes on top of fears that the economic slowdown in China is set to negatively impact the global economy far beyond its borders including, directly or indirectly, the countries of Emerging Europe and Central Asia.
Somewhat encouraging figures released recently on the Chinese economy failed to allay these concerns. The world’s second largest economy expanded by 4.9% in July-September, down from the 6.3% expansion seen in the second quarter of 2023, but ahead of analysts’ forecasts. The figures — together with positive data on industrial output and retail sales — prompted some analysts to lift their full year forecasts for 2023. Nonetheless, the slowdown in China’s growth is still evident, raising concerns among its trading partners and recipients of investment funding alike.
For the countries of Central and Southeast Europe, the impact has mainly been indirect. None are big exporters to China, trading primarily with EU member countries in their near neighbourhood. Thus the impact is largely via the decline in exports from Germany and other major European economies to China, which in turn reduces demand for inputs from Central and Southeast European manufacturers.
In an interview with bne IntelliNews in September, Beata Javorcik, EBRD chief economist, listed the indirect impact of the Chinese slowdown as one of the factors affecting the region.
“Even though prices of natural gas are back to the pre-war level they are four times as high as prices in the US. That means that competitiveness of Western Europe, including Germany is going to be eroded. The slowdown in China is not helping given the fact that China is an important market for Germany. On top of that we have eroding competitiveness in some Central European countries,” said Javorcik.
Impact further east
This is in contrast to the much more important role China plays as an importer of commodities from the Central Asian economies on its western flank.
In those countries, the EBRD’s latest Regional Economic Prospects report says: “Slowing growth in China constitutes a notable risk to the outlook, in particular for Central Asia and the Caucasus … continued weakness in China’s real estate sector is weighing on investment. With lower investment levels, growth may be structurally lower than in the past decade … Structurally slower growth in China may, in turn, result in weaker demand for the EBRD regions’ exports, directly and indirectly through global supply chains.”
Previously, China also played a crucial role in the post-pandemic rebound in several Central Asian countries, after Chinese demand for their products revived. Mongolia experienced a hike in exports in 2023 based on the revival of Chinese demand, the launch of two new rail lines connecting Tavan Tolgoi coal deposits with China and the start of underground production at the Oyu Tolgoi mine.
However, the EBRD report adds, “uncertainty over China’s slowdown and dependence on China as an export market — especially in countries like Mongolia and Turkmenistan — is a key risk to the outlook.”
Russia too has become more dependent on China as sanctions cut it off from Western markets. “Russia’s economic fortunes are also increasingly intertwined by China as following Western sanctions imposed after the invasion of Ukraine, Russia has reoriented its exports towards Asian markets,” said the report.
This is particularly evident in the energy sector, where Russia is actively switching its exports from Europe to Asia, given the political fallout from the war in Ukraine. It presently exports gas to China through the Power of Siberia-1 pipeline, and has been in talks for years on building Power of Siberia-2 to ramp up exports further.
A variety of factors are leading to worsening sentiment toward China, including debt issues plus the trade war with the US. This has been ongoing for some years, but the relationship between Beijing and Western powers became even more tense following Russia’s invasion of Ukraine.
Within China, the situation on the property market has become increasingly worrying. Rating agency Fitch singled this out in its latest Global Economic Outlook in September. Fitch commented that “the deepening slump in China’s property market is casting a shadow over global growth prospects, just as monetary tightening increasingly weighs on the demand outlook in the US and Europe.”
This was initially focussed on the high profile implosion of real estate major Evergrande. Once China's top developer, Evergrande amassed debts exceeding $300bn as it expanded, leading to a series of defaults by other developers and numerous unfinished building projects nationwide. Its founder Hui Ka Yan, once worth $42bn, has just lost his billionaire status altogether, but the repercussions go beyond Hui and his company.
Now, China's largest private property developer, Country Garden, has failed to pay the $15.4mn interest due on its dollar bonds. The company failed make the payment during the 30-day grace period after the initial payment deadline on September 17. With $11bn in debt and an additional $6bn in onshore loans, a default by Country Garden would trigger one of China's most significant corporate debt restructurings.
“The property sector’s decline has been the primary channel through which China’s economic slowdown has manifested, given that the industry represented 20 to 25%t of GDP at its peak. New annual housing starts are down 57%, and the sector will likely remain below half of its previous size over the next decade,” wrote Logan Wright, senior associate at the Center for Strategic & International Studies (CSIS), in a recent comment.
“Nothing else in China’s economy has replaced the property sector as a driver of growth, which explains why economic growth has slowed so dramatically over the past two years.”
Meanwhile, China's challenges extend beyond the property sector, including weak economic growth, soaring local government debt and high youth unemployment.
Emerging Europe and Central Asia are just two of the regions affected as a result. When China, the world's second-largest economy with a population exceeding 1.4bn, faces challenges, the global repercussions are inevitable, though there is some debate about how far these will go. Fears of a global catastrophe are exaggerated, but the impact of China's woes is undeniably far-reaching.
“No doubt China faces many structural and other challenges: slumping productivity, a shrinking labor force, restrictions on the transfer of technology imposed by the United States and other countries, an ongoing real estate bubble's correction, elevated unemployment among younger workers, and a leadership that seems to prioritise party control and national security over economic growth,” wrote Nicholas R. Lardy, non-resident senior fellow at the Peterson Institute for International Economic Studies.
“These challenges mean that China's growth will not return to anything close to the dazzling pace of 1980-2010, when annual growth averaged close to 10 percent. But a careful reading of the present situation does not support the view that China's growth is now gripped by a severe cyclical downward spiral that will persist for several years.”
Although some economists argue that China's status as the engine of global prosperity might be overstated, reduced spending within the country leads to decreased demand for raw materials and commodities elsewhere in the world. As well as Central Asia’s commodities exporters, this decline in demand affects major exporters like Australia and Brazil, as well as certain African nations
China in Emerging Europe
The countries of Central and Southeast Europe are not among these exporters, but China plays an important role in some countries from the region as an investor. There was a wave of Chinese investment after global economic crisis, when Chinese investors were snapping up cheap industrial assetsand funding high profile investment projects across the region. Such projects helped put to work the excess capacity of China’s huge engineering companies as economic growth within China started to slow. Chinese investors then branched out into other sectors such as industry.
Relations between Beijing and several countries from the region have soured in recent years and, as pointed out by bne IntelliNews columnist Marcus How, head of research & analysis at ViennEast Consulting in Vienna, there has been a decline in Chinese foreign direct investment (FDI) since 2020, while the Belt and Road Initiative (BRI) fell short of expectations. Geo-political considerations have played a significant role, prompting CESEE countries to align with US policy priorities or maintain a delicate balance between major powers.
Still, large-scale Chinese investment is continuing in certain Central and Southeast European countries, among them Hungary, Montenegro and Serbia. The leaders of both Hungary and Serbia countries were prominent at the recent BRI summit in Beijing earlier in October, alongside all five of the Central Asian republics’ leaders. Despite China’s domestic problems, Serbia, for example, secured three substantial commercial agreements, collectively valued at €4bn during the summit, as well as signing a free trade agreement with China.
That was just part of the $100bn pledged by Chinese President Xi Jinping. However, there are already signs that Beijing is less eager to spend lavishly on large infrastructure projects around the world, and the emphasis has shifted to smaller, more focussed projects.