China’s economy in pain | Paper Jam News

This year, several factors have held back growth in China. The first is linked to the real estate sector, which weighs nearly a quarter of the Chinese economy. After years of excess in this sector, new housing starts are down more than 30% year-on-year and real estate prices have started to fall. Over the past decade, too much housing has been built compared to the needs of the population. According to estimates, empty dwellings in China could house the equivalent of the German population.

For the Chinese, real estate investment is very often the only alternative to the savings account in a country where the capital account remains closed, restricting the possibility of the Chinese to invest their capital abroad. It is therefore not insignificant that 70% of household wealth is invested in real estate, a high figure compared to other countries.

The 3 red lines

A turning point for this sector of the economy came in August 2020 when the Chinese government introduced the 3 “red lines” for real estate developers. These limits were primarily intended to limit the excess indebtedness of these players. Some developers have found themselves in difficulty, no longer finding enough cash from financial institutions to finance the development of their activities. Consequently, a large number of new projects have been put on hold due to lack of funding.

Another important aspect of the real estate crisis in China is the early sale of projects, which represented almost half of the financing needs of developers in 2020. However, a protest movement from buyers emerged during the summer of 2022 and dried up this source of funding. Some buyers have refused to repay their loan for a property that was not yet completed and whose work was suspended. Since then, the government has taken steps to funnel funding to developers to help them complete projects under construction. This could lead to a rebound in new sales and activity in this sector.

However, the possible improvement of the activity of the Chinese real estate sector comes up against major challenges in the medium and long term: the need to reduce the indebtedness of developers and the decline of the Chinese population. Moreover, it is doubtful that real estate will retain its appeal for the Chinese given the loss of confidence suffered and the drop in prices which make this investment less attractive.

Cloudy long-term outlook

External demand is the second factor that should weigh on the Chinese economy in the coming months. In 2020 and 2021, when the Covid restriction measures were in place, American and European consumers favored the purchase of goods over services. China, being “the factory of the world”, took advantage of this situation. This overconsumption of goods during the Covid period has given way to a normalization of household behavior towards more services. Consequently, Chinese exports, which account for almost a fifth of the Middle Kingdom’s economy, are expected to decline in the coming quarters.

The third negative element for China is its zero Covid policy which is impacting service activity. For the moment, it is difficult to imagine a complete lifting of the restriction measures. First, new cases of infection have reached their highest since last April when Shanghai went into lockdown and second, only 70% of people over 60 are fully vaccinated. It is therefore unlikely at this stage that the Chinese government will significantly relax the restrictive measures in place.

That being said, at some point when the restrictive measures are put aside – which could happen sometime in the next year – the economy will benefit from a cyclical upswing in activity. But this will only be temporary, as the long-term outlook for the Chinese economy has darkened, due to the decline in population, the marked slowdown in productivity gains, the excessive indebtedness of certain sectors as well as the to the new restrictions on the export of American technological goods which will greatly restrict the ability of the Chinese economy to move upmarket.