While experts debated the rise of China not long ago, the emerging consensus now heralds the end of the “China Miracle.”
China's old model of credit and investment-led growth has been severely undermined by the housing crisis as well as weak consumption and export demand. However, recent data suggests that the recovery has regained momentum.
China's real GDP growth rate reached 5.2% year-on-year in the first three quarters of 2023. The production of solar cells, service robots and integrated circuits increased by 62.8%, 59.1% and 34.5%, respectively, in October 2023.
Infrastructure and manufacturing investment rose 5.9% and 6.2%, respectively, in the first ten months, offsetting the 9.3% decline in real estate investment. Outside the real estate sector, private investment increased by 9.1%.
Consumption also rebounded strongly, although exports fell 6.4% year-on-year in October 2023, marking a six-month consecutive decline consistent with weak global demand and the trend towards deglobalization.
Still, China's automobile exports are likely to exceed four million units by the end of 2023 – a milestone in China's industrial modernization and its rise to the top of the value chain.
The housing crisis has raised concerns about China's economy and highlighted the need to restructure the heavily indebted and speculative real estate sector. Beijing's “three red lines” policy for 2020 aimed to achieve this, with the current slowdown in the real estate sector a deliberate policy decision.
While this adjustment will result in financial losses for investors and creditors, the financial risks are likely to be limited for four reasons.
China's real estate market is increasingly putting pressure on the economy. Image: Screengrab / CNBC
First, direct bank financing for real estate developers accounts for 2.5-3% of total bank loan book, 80% of real estate debt is attributable to homebuyers, and the historical mortgage default rate is only 0.5%. Secondly, property prices are monitored by the government and the decline in property prices was limited.
Third, unlike Japan, Chinese companies did not use real estate as collateral on a large scale in the 1980s, and unlike the 2008 U.S. subprime mortgage crisis, there has been no large-scale subprime lending or financialization in China's real estate industry.
Finally, since a large portion of the real estate industry's debt is domestic debt denominated in renminbi, the People's Bank of China and state-owned asset management companies can provide the necessary liquidity or capital to support the banks if necessary.
The real estate sector's balance sheet has shrunk by 1.7 trillion yuan ($240 billion) – just 1.4% of GDP. The real estate sector is unlikely to trigger a full-scale financial crisis.
In the future, the real estate sector will stabilize thanks to supply and demand side measures.
On the supply side, loans are specifically granted to real estate developers to complete unfinished residential projects. On the demand side, recent down payment relaxations for second or third properties, reduced mortgage interest rates and a new real estate sales tax refund are creating incentives for home buyers.
However, the real estate sector will remain subdued due to slowing urbanization and population growth. The challenge is to find alternative growth engines to replace the over-investment in the real estate sector.
China must continue to invest in research and development and create productivity-led growth. China is now a leader in many strategic technologies, such as new energy vehicles, artificial intelligence and 5G.
As investment in the real estate sector declines, loans have been extended to the industrial sector to continue financing industrial production and innovation. China also needs to further boost private household consumption.
Consumer spending contributed to 57% of GDP growth over the last decade, although Covid-19 and housing market adjustments have dampened consumer demand.
To encourage private consumption, China must first create conditions for the private sector to create more jobs and raise wages. The Central Committee's July 2023 31-point plan to promote private sector growth can reassure entrepreneurs that the government will continue to provide them with financial resources and market access.
The central government should introduce a jobs guarantee program whereby jobs are created at the local level and funded by the central government. These jobs could employ young people and provide them with skills to meet demand in the private sector and place participants into private jobs where available. This will alleviate youth unemployment and increase consumer confidence as income is secured.
University graduates attend a job fair in Zunyi, Guizhou Province of China, June 23, 2022. Image: China News Service / Qu Honglun
The central government should also increase financing support for local governments. While municipal spending plays an important role in economic stabilization, they continue to struggle with crippling debt due to the economic slowdown and limited land sales.
The central government should consider significantly increasing fiscal transfers to local governments to improve their capacity for countercyclical spending and debt management. The recent issuance of a trillion euros worth of government bonds for fiscal transfers to local governments is a good first step, but the scale needs to be much larger.
Despite various challenges, China's economy is still growing steadily and the government has numerous policy tools to manage and support the economy. Fueling the “China collapse” narrative is premature at best.
Yan Liang is Kremer Chair Professor of Economics at Willamette University, Oregon.
This article was originally published by East Asia Forum and is republished under a Creative Commons license.