China Economy Collapse: Is the Country Floundering Financially or Showing Signs of Life?

Key takeaways

• China’s economy is struggling right now thanks to a crisis in the property sector
• But new data suggested home loans are on the up and inflation improved
• The yuan rallied 1% on Monday, while Chinese stocks were up 0.7%

All eyes have been on the Chinese economy recently as the country has struggled to pull itself away from economic doom and gloom after emerging from strict Covid lockdowns. Property developers Evergrande and Country Garden Holdings have been making headlines for the wrong reasons as both companies teeter on the edge of bankruptcy, seriously threatening China’s economic prospects.

But there’s a light at the end of the tunnel after new data today revealed an uptick in inflation and loans that left investors breathing a sigh of relief. Here’s what you need to know.

What’s happening with China’s economy?

The ongoing property crisis in China has stymied the country’s financial outlook as the government tries to get a grip on a situation that’s been brewing for decades and came to a head when property developer Evergrande defaulted on its payments in 2021. Evergrande has since filed for a restructuring plan to avoid bankruptcy in the U.S.

Country Garden Holdings, another property developer, narrowly avoided the same fate last week when it agreed to pay $22.5 million in bond coupon payments instead. The pressure from Country Garden Holdings also put China’s $138 billion shadow bank industry at risk, with the sector warning it could also potentially default on debts.

For July, monthly loans plummeted to a 14-year low in China as consumers, who rely on the property market as a stable asset to invest in, pulled back amid the recent turmoil. The Chinese government has tried to boost the mortgage industry by slashing red tape and loosening down payment requirements to attract new buyers.

The Chinese yuan also fell to its lowest level since 2007 last week. All of this has put China’s growth rate, which had been forecast at 5% for the year, under pressure.

Is China turning a corner?

New data from Monday showed China’s credit expanded more than expected after the Chinese central bank pressured lenders to boost loans and the Chinese government sold more bonds. Aggregate financing was 3.12 trillion yuan ($429 billion), higher than the 2.7 trillion yuan predicted.

Financial institutions also offered more new loans than anticipated, arriving at 1.36 trillion yuan worth instead of the 1.25 trillion yuan forecasted. Those are two good bits of news for China’s economy, as it’s a glimmer of hope that recent efforts to stimulate the sluggish property sector are working.

Consumer prices also increased in China in August after deflation in July, and factory-gate deflation improved. Chinese imports and exports have also narrowed their losses.

The result? The CSI 300 index rose by 0.7% on Monday, ending a four-session losing streak. The yuan also made a 1% gain, the most seen since March this year.

The bottom line

China has been on the brink for some time, with the rest of the world watching nervously to see how the world’s second-largest economy fares. Thankfully, the economic picture just got a little brighter thanks to today’s data showing improvements in inflation, loans and the yuan’s price.

It’s still far too early to celebrate any victories — the Chinese government needs to stabilize the situation further. What’s clear is that China’s growth rate is still under serious pressure and the country may well miss its target for the first time in years.