Weakness in China's Economy Threatens the Global Economy

At the recent G20 Summit held in New Delhi, India, world leaders shared their awareness of the downside risks to the global economy. Their awareness was especially high in regard to problems confronting China's economy, such as in its mammoth property sector.

The summit declaration emphasized the importance of cooperation among countries. However, the reality is that the world remains divided. This is evidenced by Russia's ongoing invasion of Ukraine. And also by the fact that the United States and China remain at loggerheads.

One sentence in the Preamble to the G20 Leaders' Declaration reads as follows: "Headwinds to global economic growth and stability persist."

Overall, the Leaders' Declaration summed up the downward economic risks facing the world. Yet, the slowdown in China, which has been the driving force behind the global economy, is of particular concern.

China Evergrande (Hengda) Group, a Chinese real estate giant, is saddled with massive debts. In August, it filed for bankruptcy protection in the US. Financing problems have also surfaced at Country Garden, another major property developer.

Facing a 'Lost 20 Years'

Naoto Saito, chief researcher at the Daiwa Institute of Research, has looked at this problem. He says that Country Garden is noted for its comparatively solid management but that even it is facing difficulties. This fact, he says, can be viewed as evidence that investors are beginning to shy away from China's property sector.

"Clearly, the situation is worsening," he concludes.

In addition to the real estate problem, China also faces other serious problems. For example, it has excessive public debt, youth unemployment exceeding 20 percent, and a society that is getting older and giving birth to fewer children at a faster rate than in Japan.

Even though the problems in the real estate sector have caused banks to take on a large number of non-performing loans, as of yet that has not developed into a financial crisis. Nonetheless, Saito warns, "It is highly likely that China will fall into a situation like Japan's 'lost 20 years.'"

The Inflation Factor

Takeshi Takayama, a researcher with the NLI Research Institute, points out, "Inflation continues to be a risk factor for the global economy."

The risk of a sudden global economic slowdown remains. Meanwhile, the US and European countries are attempting to cool economic excesses by continuing to raise interest rates. The high incidence of natural disasters worldwide due to climate change could also have further negative impacts on food prices and other areas.

Crises often occur suddenly. Since the world economy has become closely linked due to globalization, cooperation in responding to crises is absolutely essential. That is also the raison d'etre for the G20.

In the end, the latest G20 meeting was able to avoid the worst-case scenario of not issuing a final leaders' declaration. However, there is no guarantee that the G20, which includes countries with very different values from those of the West like Russia and China, will be able to unite in the event of an actual crisis.

There is also the reality that the contents of the summit declaration cannot be taken at face value.