China’s Economic Slowdown Raises Concerns over Property Market Downturn
HONG KONG, Sept 1 – China’s economic growth is slowing down as policymakers attempt to address a property market downturn, with major developer Country Garden facing troubles. This has led to mounting concerns about whether the world’s second-largest economy is approaching a crunch point.
There are several factors contributing to China’s economic slowdown. Unlike Western consumers who experienced revenge spending after the COVID-19 pandemic, Chinese citizens were left largely to fend for themselves. This has resulted in a lack of a spending spree that was expected to boost the economy. Additionally, the demand for Chinese exports has softened as key trading partners struggle with rising living costs. Furthermore, with 70% of Chinese household wealth tied up in real estate, a significant slowdown in the sector is affecting other parts of the economy.
While concerns over China’s economy have arisen in the past, this time may be different. Alarm bells rang during the global financial crisis in 2008-09 and a capital outflow scare in 2015. China managed to revive confidence back then through infrastructure investment and encouraging property market speculation. However, the current infrastructure upgrades have resulted in excessive debt, and the bursting of the property bubble poses risks to financial stability. This time, China’s debt-fueled investment in infrastructure and property has peaked, and exports are slowing alongside the global economy. Therefore, the only remaining source of demand to stimulate the economy is household consumption.
The low household spending in China is a problem. Household consumption as a percentage of the GDP was already low even before COVID-19, leading economists to identify it as a structural imbalance. Weak domestic demand has impacted private sector investment and has contributed to China sliding into deflation. If deflation persists, it could exacerbate the economic slowdown and deepen debt problems. The consumption and investment imbalance in China is greater than that of Japan’s before its “lost decade” in the 1990s.
The outlook for China’s economic slowdown remains uncertain. Weak data readings have raised concerns that China may struggle to meet its economic growth target of about 5% for 2023 without more government spending. While 5% growth is still higher than many other major economies, economists consider it disappointing for an economy that invests about 40% of its GDP every year. There is also uncertainty about the government’s willingness to implement large fiscal stimulus due to high levels of municipal debt. The stress in the property market, which accounts for about a quarter of economic activity, further raises concerns about policymakers’ ability to reverse the growth decline.
To address the economic slowdown, some economists suggest measures to boost household consumption. This includes government-funded consumer vouchers, significant tax cuts, faster wage growth, and building a social safety net with higher pensions, unemployment benefits, and improved public services. However, no such steps were announced at a recent Communist Party leadership meeting. Economists are now looking to a key party conference in December for potential structural reforms.
In an attempt to mitigate pressure on profit margins and reduce lending costs for borrowers, major Chinese banks recently cut interest rates on yuan deposits. Lower rates are expected to boost consumption, but they also result in a transfer of funds from savers to borrowers. Economists argue that transfers of resources from the government sector to households would have a more meaningful long-term impact. However, rate cuts also carry the risk of yuan depreciation and capital outflows, which China aims to avoid by cutting foreign exchange reserves that financial institutions must hold.
Overall, China’s economic slowdown and the challenges in the property market highlight the need for policymakers to take action to stimulate household consumption and address structural imbalances in the economy. The upcoming party conference in December will play a crucial role in determining the direction of China’s economic reforms.