While pundits not long ago were debating China’s rise, the emerging consensus is now heralding an end to the ‘China miracle’. China’s old model of credit-fuelled, investment-driven growth has been severely undercut by the real estate crisis, as well as weak consumption and export demand. But recent data suggests that recovery has regained momentum.
China’s real GDP growth rate in the first three quarters of 2023 reached 5.2 per cent year-on-year. Solar cell, service robots and integrated circuits production increased by 62.8 per cent, 59.1 per cent and 34.5 per cent respectively in October 2023. Infrastructure and manufacturing investments expanded by 5.9 per cent and 6.2 per cent in the first ten months, offsetting the 9.3 per cent contraction in real estate investment. Outside of the real estate sector, private investment grew by 9.1 per cent.
Consumption also saw a strong rebound, though exports fell by 6.4 per cent year-on-year in October 2023, marking a six-month consecutive decline in line with weak global demand and the trend towards deglobalisation. Still, China’s automobile exports will likely exceed four million units by the end of 2023 — a milestone in China’s industrial upgrading and its move towards the higher end of the value-added chain.
The real estate crisis has raised concerns about the Chinese economy, revealing the necessity of restructuring the highly leveraged and speculation-fuelled property sector. Beijing’s 2020 ‘three red lines’ policy aimed to accomplish this, with the current slowdown in the housing sector a deliberate policy choice.
While this adjustment will produce financial losses for investors and creditors, the financial risks will likely be contained for four reasons. First, direct bank financing for real estate developers accounts for 2.5–3 per cent of total bank loan balances, home buyers account for 80 per cent of housing related debt and the historical default rate for mortgages is only 0.5 per cent. Second, real estate prices are monitored by the government and housing price decline has been limited.
Third, unlike Japan in the 1980s, Chinese companies have not extensively used real estate as collaterals and unlike the 2008 US subprime mortgage crisis, China’s real estate industry has not experienced large-scale subprime lending or financialisation. Finally, as a large proportion of the real estate industry’s debt is domestic debt in renminbi, the People’s Bank of China and state-owned asset management companies can provide necessary liquidity or capital to support banks when needed.
The real estate sector’s balance sheet has shrunk by 1.7 trillion yuan (US$240 billion) — a mere 1.4 per cent of GDP. It is unlikely that the real estate sector will trigger a widespread financial crisis.
Yan Liang is Kremer Chair Professor of Economics at Willamette University, Oregon.
East Asia Forum