As we’ve covered many times already, China’s economy is struggling, particularly the construction portion which makes up about a quarter of the country’s GDP. Last week while all of us were distracted by the war in Israel, one of China’s major developers missed loan payments and said it would soon default on its debt.

The embattled property developer Country Garden said on Tuesday that it was unable to repay a loan and expected to miss upcoming overseas debt payments as a result of plunging sales from China’s spiraling property crisis.

The announcement, made on the Hong Kong Stock Exchange, is effectively a statement from Country Garden, once China’s largest homebuilder, that it is likely to default with roughly $187 billion in liabilities. Country Garden is one of the biggest causalities of China’s imploding real estate market, which has sent Evergrande, another giant property developer, into bankruptcy…

“Prevailing market conditions have made it difficult for the group to procure sufficient cash to enhance its liquidity position within a short period of time,” the company said in the statement. “Consequently, the group’s cash position remains under significant pressure.”

What’s really happening here is pretty simple. Country Garden was using the money from sales of apartments it promised to build in the future to fund the construction of apartments people had paid for but haven’t yet received. That kind of system only works so long as sales continue to go up. But as you can imagine, sales have dropped off a cliff since Evergrande defaulted. Far fewer people are buying now which means these companies have no money to build homes they sold in the past but haven’t finished. [emphasis added]

Country Garden said presales of unfinished apartments, an important indicator of future revenue, fell for a sixth straight month in September, to 6.17 billion yuan, or $862 million. That was down 81 percent from a year earlier.

So because construction is such a big part of the economy, the problems created by these defaults will spread to banks and local government. The question now is whether or not China’s government can prevent it from spiraling out of control. So far it’s not looking good.

China has a series of “golden weeks” throughout the year which are full weeks off for everyone. These are usually big times for travel and shopping and authorities were hoping that the golden week starting at the beginning of October might help pull the economy out of the doldrums with a rush of “revenge spending” after years of zero-COVID lockdowns. But golden week is over and the revenge spending didn’t happen.

China has concluded its Golden Week holiday on a muted note, with key travel and spending data showing weaker-than-expected recovery in consumption amid a wider economic slump…

Data from Alipay, China’s largest payment app with over 700 million active monthly users, showed that the number of outbound travelers using its payment services amounted to only 80% of the level in 2019. Average spending per person increased slightly, to 105% of the 2019 level.

Beijing has been hoping that a wave of “revenge spending” would prop up economic growth, after Chinese consumers emerged from three years of pandemic restrictions in December.

The NY Times reports today there are increasing doubt the Chinese government can limit the damage. That failure is causing some Chinese citizens to lose faith in the one-party system.

The housing crisis has presented an acute challenge for China’s political leadership: It is trying to wean the country off its decades-long dependence on real estate to drive economic growth, but doing so is deepening a crisis of confidence. Financial markets are questioning the future of China’s economic miracle, and households are abandoning their faith in the Chinese Communist Party’s promise of a better economic future.

“In the past, I believed in the government and the party and the country,” said Mr. Meng, whose family invested $300,000 in Evergrande’s wealth management arm and is still owed $194,000. Warned by the police not to file a complaint with higher levels of the government, Mr. Meng said that trust had been tested. “Now I can only say that I am quite bitterly disappointed,” he said.

Economists, investors and central banks around the world are warning of the risks to China’s financial stability, calling on Beijing to act to stabilize the housing crisis. The International Monetary Fund’s chief economist, Pierre-Olivier Gourinchas, said last week that China’s real estate crisis was undermining confidence and causing financial difficulties…

Chinese officials have tried to put a floor under falling real estate sales in recent weeks but so far to little effect. Country Garden failed to make a payment on nearly $200 billion of debt on Tuesday and still has more than 400,000 apartments that it sold but has not finished building.

What China does seem to be doing is looking for people to take the blame. Today the former head of China’s central bank was arrested.

Liu Liange, chairman of the state-owned bank from 2019 to 2023, had resigned from his position in March this year.

Weeks later, authorities announced Mr Liu was facing corruption charges.

The 62-year-old is one of the most senior bankers to be ensnared in President Xi Jinping’s anti-corruption probe into China’s $60 trillion (£49 trillion) financial sector.

He’s not the first financial bigwig to face charges in recent years. Financial crimes can lead to a death sentence in China:

In 2021, Lai Xiaomin, the former chairman of Huarong – one of China’s biggest state-controlled asset management companies – was executed after being found guilty of corruption and bigamy.

The same year, former China Development Bank chairman Hu Huaibang was sentenced to life in prison in a 85.5 million yuan bribery case.

All of this looks pretty bad for China’s recovery. But the country faces and even bigger problem over which it has little control. The population of China has started to decline. Last year there was a 10% slide in births which meant the total number was the lowest since 1949.

The number of births in China tumbled 10% last year to hit their lowest level on record, a drop that comes despite a slew of government efforts to support parents and amid increasing alarm that the country has become demographically imbalanced.

China had just 9.56 million births in 2022, according to a report published by the National Health Commission. It was the lowest figure since records began in 1949.

All of this is just the start of China’s demographic shift toward a smaller and older population.

China is aging and shrinking. The country’s population surged from 540 million in 1949 to a peak of 1.4 billion in 2021 but tipped over into decline in 2022. In coming decades, it will follow the rest of East Asia into a future marked by low fertility, rapid aging, and a steadily declining population. By the middle of the century, China is projected to have up to 200 million fewer people than it does today. Simultaneously, the median age will steadily climb from 38 years old in 2020 to around 50.

China’s problems aren’t limited to a few big builders going bankrupt. The bigger problem is that its population is going to continue to shrink and age making the kind of growth it experienced in the past couple decades a thing of the past.