Has China’s economy run out of steam?

Published

2 years ago

September 4, 2023

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The southern Chinese city of Zunyi is awash with signs the nation’s economy is not in good health.

Everywhere you look there are unfinished infrastructure projects; empty apartments, half-constructed tunnels, huge projects where, it seems, the money just ran out.

It is a symbol of a system that is stuttering.

The mighty Chinese economy, that once delivered seemingly miraculous growth of some 10% plus a year, is slowing.

Cracks, driven by structural weaknesses that were once easy to pave over, have started to appear.

The economic model of driving up GDP with vast borrowing and building worked when China was poor and needed new roads, bridges and airports, but it is no longer sustainable in a modern China that now finds itself drowning in debt and with nothing left to build.

There are big questions about what happens next.

In Zunyi, one road in particular speaks volumes about the troubles now plaguing parts of the system.

Snaking over parts of the city, the Funxin Expressway is a multilane highway that cost 4bn yuan to build, but sections now lie incomplete and abandoned.

On one side, a handful of cars occasionally drive by, the other is completely empty save for a few locals who now use it to take a stroll or walk their dogs.

There is something almost eerie about walking along it – a sense that the area has been somewhat forgotten.

A local woman, Mrs Chen, tells us the bridge has been like this for ten years.

“A lot of land was taken, many people had to move away,” she says.

“Why has the construction just stopped?” she asks, “This is a government fund, I think they didn’t use the money for anything. I think it’s been wasted.”

When we asked local authorities, the Ministry of Foreign Affairs Zunyi branch said the expressway was completed on 31 August 2023 (just two days after we visited) and is scheduled to be put in use the first half of September.

They added the local government “actively encourages and guides construction companies and developers to move forward with construction in an orderly fashion,” and that the government “strictly follows national and provincial rules and regulations on investment and management”.

On the other side of a small hill, I find the connecting tunnel, where the project has come to an abrupt stop.

Opposite the entrance of the tunnel are huge concrete pillars where construction was clearly meant to continue and beyond that, blocks of homes vacated and marked for demolition – lives moved on to make space.

There are just a few residents who have hung on here, including Shi Chunli who has lived here for 40 years.

She claims to have given the authorities her property in exchange for a new apartment elsewhere.

“They said we would have a new apartment in three years” she says, “it will be the fifth year this September, but everything is still the same.”

And she has a pretty clear idea as to why her life is in this limbo.

“It’s mainly that there is no money. The state does not have any money left.”

There are projects like this across China, but there is a particularly high concentration in Guizhou province, where Zunyi is located.

In fact, Guizhou province, one of the poorest in the country, is also the most indebted with its debt pile over 135% of its GDP.

This rural province leaned heavily into the Chinese growth model that for so long delivered such remarkable numbers: huge borrowing, massive investment and vast building – regardless of whether the projects were needed.

Indeed, Guizhou has 11 airports, many quite close to each other, and nearly half of the world’s 100 tallest bridges, according to state media outlet Economic Daily.

It is a model that has been replicated throughout the country. Investment has made up an average of 44% of China’s economy in recent years, for which experts say there is “no remotely comparable historical precedent”.

But while this model made sense when China was playing catch up, it has now become a major liability.

The government has few places to turn to deliver the high growth it has become accustomed to.

But this is a problem the government cannot ‘invest’ its way out of, as it has in the face of previous economic challenges.

As many experts will point out, this level of unproductive investment has been a symptom of the Chinese economy for many years, so why is it biting now?

It is largely because other parts of the economy are struggling – exposing the fault lines at its core.

Last month, prices in China actually fell when compared to the same month last year, raising fears of more long-term deflation.

The key issue is that consumer demand simply hasn’t bounced back post-pandemic as China’s leaders hoped it would.

Months of zero-COVID rules that saw whole cities plunged into sudden extreme lockdowns destroyed thousands of businesses and vastly depleted family savings.

The net result is that people just don’t have the money to spend, and what they do have they are reluctant to part with (China’s saving rate is one of the highest in the world according to the IMF).

These trends were clear in some of the smaller markets around Zunyi.

“Business is bad now,” one stall holder told us, “it’s getting worse year after year.”

And why?

“The pandemic,” she says, “the impact of the pandemic is too big.”

There are other issues too, highly interventionist government policy that cracked down on certain industries like tech and private tutoring have left certain sectors crippled and foreign investment nervous.

And in this environment millions of young people are struggling to find work; the number of 16-year-olds out of work in June was a record 21.3%.

The government has since stopped publishing these figures, but experts fear the true number may be much higher.

But perhaps most threatening of all is the deep crisis in the housing market.

In a similar way to local government spending on infrastructure, Chinese developers have spent years borrowing huge sums to build millions of apartments, often pre-selling them to buyers before construction was complete.

Following moves by the central government in 2021 to try and curb this excessive borrowing, many found themselves unable to afford their debt payments and some like Evergrande, once one of China’s biggest developers, defaulted.

It plunged the market into a crisis which it has struggled to recover from, leaving many buyers with unfinished homes and many others unwilling to invest in property.

Prices have fallen and there have been huge knock-on impacts on industries that service construction.

This month, the spotlight has been on Country Garden, another Chinese developer, once considered a safe pair of hands, as it too struggled to make a scheduled bond payment.

Shares in the firm have rallied, however, following reports it has agreed a deal with creditors to make the payments in instalments over the next three years.

There are fears about how all this will play out and whether it will affect the rest of the world.

With the Chinese economy facing increasing global scrutiny, President Xi Jinping has surprised commentators by signalling he will not attend this weekend’s G20 summit in India. Premier Li Qiang will attend instead.

But experts insist there almost certainly won’t be a major financial crash.

“It’s very unlikely because the financial breakdown is really a balance sheet breakdown,” explains Michael Pettis, a renowned expert on the Chinese economy and professor at Peking University.

“In China, the regulators are so powerful, and they can restructure liabilities at will, so that you will never have a balance sheet breakdown.

“Over the long-term, that’s a bad thing because it means that the necessary adjustment is much slower than otherwise. But from a social and political point of view, that’s a good thing, particularly over the short-term.”

What is most likely, he and other experts insist, is that China sees a more prolonged period of slow down and re-adjustment in its economy akin to what happened to Japan from the 1990s onwards.

There will, however, likely be some pain to come for ordinary Chinese people as this slow but ultimately necessary process plays itself out.

Business

AA owners line up banks to steer path towards £4.5bn exit

Published

3 hours ago

May 24, 2025

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AA owners line up banks to steer path towards £4.5bn exit

The owners of the AA, Britain’s biggest breakdown recovery service, are lining up bankers to steer a path towards a sale or stock market listing next year which could value the company at well over £4bn.

Sky News has learnt that JP Morgan and Rothschild are in pole position to be appointed to conduct a review of the AA’s strategic options following a recovery in its financial and operating performance.

The AA, which has more than 16 million customers, including 3.3 million individual members, is jointly owned by three private equity firms: Towerbrook Capital Partners, Warburg Pincus and Stonepeak.

Insiders said this weekend that any form of corporate transaction involving the AA was not imminent or likely to take place for at least 12 months.

They added that there was no fixed timetable and that a deal might not take place until after 2026.

Nevertheless, the impending appointment of advisers underlines the renewed confidence its shareholders now have in its prospects, with the business having recorded four consecutive years of customer, revenue and earnings growth.

A strategic review of the AA’s options is likely to encompass an outright sale, listing on the public markets or the disposal of a further minority stake.

Stonepeak invested £450m into the company in a combination of common and preferred equity, in a transaction which completed in July last year.

That deal was undertaken at an enterprise valuation – comprising the AA’s equity and debt – of approximately £4bn, the shareholders said at the time.

Given the company’s growth and the valuation at which Stonepeak invested, any future transaction would be unlikely to take place with a price of less than £4.5bn, according to bankers.

The AA, which has a large insurance division as well as its roadside recovery operations, remains weighed down by a substantial – albeit declining – debt burden.

Its most recent set of financial results disclosed that it had £1.9bn of net debt, which it is gradually paying down as profitability improves.

AA owners over the years

The company has been through a succession of owners during the last 25 years.

In 1999, it was bought by Centrica, the owner of British Gas, for £1.1bn.

It was then sold five years later to CVC Capital Partners and Permira, two buyout firms, for £1.75bn, and sat under the corporate umbrella Acromas alongside Saga for a decade.

The AA listed on the London Stock Exchange in 2014, but its shares endured a miserable run, being taken private nearly seven years later at little more than 15% of its value on flotation.

Under the ownership of Towerbrook and Warburg Pincus, the company embarked on a long-term transformation plan, recruiting a new leadership team in the form of chairman Rick Haythornthwaite – who also chairs NatWest Group – and chief executive Jakob Pfaudler.

For many years, the AA styled itself as “Britain’s fourth emergency service”, competing with fierce rival the RAC for market share in the breakdown recovery sector.

Founded in 1905 by a quartet of driving enthusiasts, the AA passed 100,000 members in 1934, before reaching the one million mark in 1950.

Last year, it attended 3.5 million breakdowns on Britain’s roads, with 2,700 patrols wearing its uniform.

The company also operates the largest driving school business in the UK under the AA and BSM brands.

In the past, it has explored a sale of its insurance arm, which also has millions of customers, at various points but is not actively doing so now.

By recruiting a third major shareholder last, the AA mirrored a deal struck in 2021 by the RAC.

The RAC’s then owners – CVC Capital Partners and the Singaporean state fund GIC – brought the technology-focused private equity firm, Silver Lake, in as another major investor.

A spokesman for the AA declined to comment on Saturday.

Business

US-EU trade war fears reignite as Europe strikes back at Trump’s threat

Published

11 hours ago

May 24, 2025

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US-EU trade war fears reignite as Europe strikes back at Trump's threat

Fears of a US-EU trade war have been reignited after Europe refused to back down in the face of fresh threats from Donald Trump.

The word tariff has dominated much of the US president’s second term, and he has repeatedly and freely threatened countries with them.

Money blog: Trump sends message to UK on energy bills

This included the so-called “liberation day” last month, where he unleashed tariffs on many of his trade partners.

On Friday, after a period of relative calm which has included striking a deal with the UK, he threatened to impose a 50% tariff on the EU after claiming trade talks with Brussels were “going nowhere”.

The US president has repeatedly taken issue with the EU, going as far as to claim it was created to rip the US off.

However, in the face of the latest hostile rhetoric from Mr Trump’s social media account, the European Commission – which oversees trade for the 27-country bloc – has refused to back down.

EU trade chief Maros Sefcovic said: “EU-US trade is unmatched and must be guided by mutual respect, not threats.

“We stand ready to defend our interests.”

Fellow EU leaders and ministers have also held the line after Mr Trump’s comments.

Polish deputy economy minister Michal Baranowski said the tariffs appeared to be a negotiating ploy, with Dutch deputy prime minister Dick Schoof said tariffs “can go up and down”.

French trade minister Laurent Saint-Martin said the latest threats did nothing to help trade talks.

He stressed “de-escalation” was one of the EU’s main aims but warned: “We are ready to respond.”

Mr Sefcovic spoke with US trade representative Jamieson Greer and commerce secretary Howard Lutnick after Mr Trump’s comments.

Mr Trump has previously backed down on a tit-for-tat trade war with China, which saw tariffs soar above 100%.

Sticking points

Talks between the US and EU have stumbled.

In the past week, Washington sent a list of demands to Brussels – including adopting US food safety standards and removing national digital services taxes, people familiar with the talks told Reuters news agency.

In response, the EU reportedly offered a mutually beneficial deal that could include the bloc potentially buying more liquefied natural gas and soybeans from the US, as well as cooperation on issues such as steel overcapacity, which both sides blame on China.

Stocks tumble as Trump grumbles

Major stock indices tumbled after Mr Trump’s comments, which came as he also threatened to slap US tech giant Apple with a 25% tariff.

The president is adamant that he wants the company’s iPhones to be built in America.

The vast majority of its phones are made in China, and the company has also shifted some production to India.

Shares of Apple ended 3% lower and the dollar sank 1% versus the Japanese yen and the euro rose 0.8% against the dollar.

Business

British taxpayers’ £10.2bn loss on bailout of RBS

Published

17 hours ago

May 23, 2025

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British taxpayers' £10.2bn loss on bailout of RBS

British taxpayers are set to swallow a loss of just over £10bn on the 2008 rescue of Royal Bank of Scotland (RBS) as the government prepares to confirm that it has offloaded its last-remaining shares in the lender as soon as next week.

Sky News can reveal the ultimate cost to the UK of saving RBS – now NatWest Group – from insolvency is expected to come in at about £10.2bn once the proceeds of share sales, dividends and fees associated with the stake are aggregated.

The final bill will draw a line under one of the most notorious bank bailouts ever orchestrated, and comes nearly 17 years after the then chancellor, Lord Darling, conducted what RBS’s boss at the time, Fred Goodwin, labelled “a drive-by shooting”.

Money latest: Brits urged to leave energy price cap

Insiders believe a statement confirming the final shares have been sold could come in the latter part of next week, although there is a chance that timetable could be extended by a number of days.

The chancellor, Rachel Reeves, is likely to make a statement about the milestone, although insiders say the Treasury and the bank are keen to simply mark the occasion by thanking British taxpayers for their protracted support.

A stock exchange filing disclosing that taxpayers’ stake had fallen below 1% was made last week, down from over 80% in the years after the £45.5bn bailout.

The stake now stands at 0.26%, meaning the final shares could be offloaded as early as the middle of next week, depending upon demand.

Total proceeds from a government trading plan launched in 2021 to drip-feed NatWest stock into the market have so far reached £12.8bn.

Based on the bank’s current share price, the remaining shares should fetch in the region of £400m, taking the figure to £13.2bn.

In addition, institutional share sales and direct buybacks by NatWest of government-held stock have yielded a further £11.5bn.

Dividend payments to the Treasury during its ownership have totalled £4.9bn, while fees and other payments have generated another £5.6bn.

In aggregate, that means total proceeds from NatWest since 2008 are expected to hit £35.3bn.

Under Rick Haythornthwaite and Paul Thwaite, now the bank’s chairman and chief executive respectively, NatWest is now focused on driving growth across its business.

It recently tabled an £11bn bid to buy Santander UK, according to the Financial Times, although no talks are ongoing.

Mr Thwaite replaced Dame Alison Rose, who left amid the crisis sparked by the debanking scandal involving Nigel Farage, the Reform UK leader.

Sky News recently revealed that the bank and Mr Farage had reached an undisclosed settlement.

During the first five years of NatWest’s period in majority state ownership, the bank was run by Sir Stephen Hester, now the chairman of easyJet.

Sir Stephen stepped down amid tensions with the then chancellor, George Osborne, about how RBS – as it then was – should be run.

Lloyds Banking Group was also in partial state ownership for years, although taxpayers reaped a net gain of about £900m from that period.

Other lenders nationalised during the crisis included Bradford & Bingley, the bulk of which was sold to Santander UK, and Northern Rock, part of which was sold to Virgin Money – which in turn has been acquired by Nationwide.

NatWest declined to comment on Friday.

A Treasury spokesperson said: “We now own less than 1% of shares in NatWest which is a significant step towards returning the bank to private ownership and delivering value for money for taxpayers.

“We are on track to exit the shareholding soon, subject to sales achieving value for money and market conditions.”