China’s Economic Struggles: Real Estate Crisis and Slow Recovery

A London-based independent think tank has highlighted the severity of the economic downfall faced by Beijing. The Chinese government is still not ready to make major changes to its economic policy as discussed in its high-profile Third Plenum recently.

The Chinese economy has continued to struggle throughout the year, showing no hopes of a strong-paced post-pandemic recovery, which was predicted by many analysts. The reopening boom after Covid never became real for China.

Key Issues in China’s Economy

According to the report by the think tank OMFIF titled, ‘How deeply rooted are China’s economic woes?,’ the country’s economic trajectory can be traced back to four major issues:

• The real estate market is in a protracted downturn.
• Chinese consumers have held back their spending after the economy reopened.
• Deteriorating local government finances threaten a sharp slowdown in investment.
• China’s private sector remains weak after policy crackdowns over the past several years.

Real Estate Market in Crisis

The housing market in the country is in shambles due to millions of unsold apartments and bankrupted real estate developers. Homebuyers have been losing confidence that the pre-sold units will be delivered on time and prices will not fall further.

Decades of excessive investment into the property market stretched the balance sheets to a breaking point. The Chinese government abruptly pushed the housing market into sharp correction through its strict Covid-19 lockdowns and poorly designed policies such as the ‘Three Red Lines’.

The government’s rescue plan for the housing market, like buying up vacant apartments, has yielded inadequate results given the massive scale of the housing problem. Housing sales in 2023 were lower than in 2017, and the sales in 2024 are on an even lower trajectory.

Slow Recovery in Private Consumption

Post-pandemic China reopened but private consumption recovered much slower than what economists had anticipated. Chinese homeowners face a negative wealth effect, with their net worth declining due to a downfall in property prices. This, alongside growing concerns over high unemployment among the youth, is prompting the Chinese populace to cut back on their spending.

The government’s policies to promote consumption have been small-scale. Instead of sending direct financial support to households, the Chinese government has pushed rebate programmes and efforts to promote ‘consumption upgrading’.

Local Government Finances

Local administrations have been spending themselves thin on infrastructure and services, way more than the budgets could handle. To bridge the gap, they use government financing vehicles to issue debt, mostly through selling bonds into the securities markets. According to the International Monetary Fund (IMF), China has funded over USD 3.8 trillion in infrastructure spending through off-balance sheet borrowing since 2018.

Impact on Business Environment

Since 2015, Chinese President Xi Jinping has pursued policies that have systematically benefitted state-owned companies at the expense of the private sector. This has further impacted China’s economic growth.