Finance & Economics

China’s Property Crisis Worsens

Last month, China’s economic system demonstrated what can be described as ambiguous performance indicators, as evidenced by a kind of statistical situation in which the volume of investment in the Asian country’s real estate sector continued to be on a downward trajectory, but at the same time a moderate increase in consumer spending was recorded, softening the effect of negative tendency associated with the flow financing directed to the area of the property.

China's Property Crisis Worsens

On Monday, June 17, the National Bureau of Statistics released data indicating that the world’s second-largest economy is currently facing problems that cannot be called insignificant or classified as circumstances of moderate sensitivity in terms of the scale of the impact. Beijing aims to achieve an economic growth rate of 5% this year. Many experts, for example, IMF analysts, assume that this result will eventually become a fact of objective reality. In the context of the corresponding expectations, the source of increased optimism was the rise of the gross domestic product (GDP) of the Asian country, which amounted to 5.3% year-on-year for the first quarter of 2024. At the same time, this does not mean that the path of economic growth will be simple and belongs to the category of guaranteed scenarios of the future. In this context, it is worth mentioning that last year for China, from the point of view of the dynamic of the mentioned process, was a kind of period of falling great hopes. It was widely believed in the expert community that the Chinese economy in 2023, against the background of the lifting of various restrictions related to the coronavirus pandemic, would demonstrate rapid growth. However, the reality turned out to be less optimistic, although the Asian country’s economic system nonetheless remained on an upward trajectory. The first quarter of the current year was a rather favorable period from the point of view of the dynamic of the economy, but this result is not a signal and, all the more so, a guarantee that the positive momentum will continue.

Official statistics, which were released on Monday, indicate that in January-May 2024 in China, total investments in fixed assets, including in the real estate sector, manufacturing, and transport areas, increased by 4% year-on-year. It is worth noting that in the first four months of the current year, the specified indicator rose by 4.2%. These data indicate that the pace of the dynamic of the growth slowed down in May.

The volume of investment in the Chinese real estate sector in the first five months of 2024 fell by 10.1% year-on-year. From January to April, this indicator declined by 9.8%. In the first quarter of 2024, the volume of investment in the Chinese real estate sector fell by 9.5%.

Also, data released on Monday indicate that in January-May of the current year, the floor space of new homes sold in the Asian country decreased by 20.3% compared to the result for the same period in 2023. The total value of new homes sold was also on a downward trajectory. In the first five months of 2024, this indicator decreased by 27.9% year-on-year.

In May, the Chinese authorities announced a set of measures aimed at normalizing the situation in the real estate sector. As part of this action Beijing’s strategy, among other things, provides for the allocation of 300 billion yuan ($41.4 billion) to clear excess housing inventory.

Liu Aihua, spokeswoman for the National Bureau of Statistics, during a press conference on Monday, said it was necessary to recognize that some time was needed for the effect of policy measures to improve the situation in the real estate sector to manifest itself, noting that the relevant market was still in the process of adjustment. She also underlined that, in general, the indicators of the national economy remain stable. Separately, Liu Aihua stated the need to realize that the external environment is complex and severe, and domestic demand continues to be insufficient. According to her, the process of recovery of the world’s second-largest economy is still a movement that is associated with numerous difficulties and challenges. It is worth mentioning that the mentioned state of affairs, which is definitely not the most favorable from the point of view of prospects, is largely due to the growing geopolitical tensions in the plane of relations between Washington and Beijing, which has already caused restrictions on Chinese companies’ access to advanced chips and equipment necessary for the manufacturing of relevant products. Moreover, last week the media reported that the United States intends to scale up the mentioned strategy of action against China.

Harry Murphy Cruise, an economist at Moody’s Analytics, says that Beijing’s measures to support the real estate market will have a certain result, but most likely will not become a factor in solving the bigger problem. According to the expert, the implementation of the specified action strategy is likely to have a positive impact in top-tier cities, where there is an increase in population and wages. At the same time, Harry Murphy Cruise underlined that the announced measures are insignificant against the background of the scale of problems in the real estate sector. According to him, the implementation of Beijing’s strategy will slow down the process of the downturn in the mentioned sector and allow the authorities to bide time until a natural recovery begins.

Retail sales, which are a barometer of consumption, rose 3.7% year-on-year in China in May. It is worth noting that in April this indicator increased by 2.3%. Spending showed growth during the five-day May Day break in the Asian country. Tourism revenues for this period amounted to 166.89 billion yuan. The mentioned indicator increased by 12.7% year-on-year and by 13.5% compared to the indicator for the May holidays in 2019.

Xu Tianchen, senior economist with The Economist Intelligence Unit, says that the dynamic retail sales for May exceeded preliminary expectations. According to the expert, the specified indicator reflects a reasonable increase in household incomes. At the same time, Xu Tianchen mentioned a negative factor in the form of a decrease in car sales.

Retail car sales in China in May amounted to 388 billion yuan in monetary terms. This indicator decreased by 1.4% year-on-year. The relevant information was published by the media, which conducted their own calculations on the database of the National Bureau of Statistics.

Xu Tianchen says that retail car sales for May probably reflect the fact that demand was frontloaded during 2022 and 2023. According to the expert, Beijing’s efforts to expand demand, including the automotive trade-in program, have not yielded results.

Commenting on the decrease in investment in the Chinese real estate sector, Xu Tianchen said that this dynamic reflects a deepening downturn that calls for the need for further policy stimulus.

Zhang Zhiwei, chief economist at Pinpoint Asset Management, says that economic activity in the Asian country was stable in May. Also, according to the expert’s preliminary assets, China’s economic growth in June is weak. Zhang Zhiwei noted that a set of measures to ease policy in the Asian country’s real estate sector has not yet stimulated an increase in demand from home buyers at the national level. At the same time, the expert underlined that the external demand for goods and services from Chinese companies and organizations seems to remain high, which is the reason that the growth rate of industrial production exceeds the pace of the upward dynamic of retail sales.

The opinion has been spreading among analysts lately that the trade tariffs proposed last month by the United States for 14 categories of products made in an Asian country, including semiconductors and electric cars, are likely to refocus Beijing’s attention on the domestic market.

Christopher Beddor, deputy director of China research at Gavekal Dragonomics, says that the growth of the Chinese economy is due to a combination of exports and investments, especially in the manufacturing sector. According to the expert, it is obvious that domestic consumption in the Asian country is quite weak.

The unemployment rate in Chinese cities was fixed at 5% last month which indicates that there are no changes in this indicator. Gary Ng, senior economist at Natixis Corporate and Investment Bank, suggests that it will be a bit difficult for the Asian country to achieve its GDP growth target in the current year. The expert says that based on preliminary estimates, China’s economy will rise by 4.8% in 2024 if Beijing does not take additional measures to stimulate the relevant process. Gary Ng stated that the current economic situation in the Asian country as a whole is quite difficult since many of the factors and circumstances that formed the present configuration of the state of affairs have not shown significant improvement recently. According to the expert, against the background of the positive and very fast dynamic of production in China, the question arises about the likelihood that at some point several local industries will face the problem of excess capacity.

Jacqueline Rong, chief China economist at BNP Paribas SA, says that the most disappointing aspect of the May data released by the National Bureau of Statistics is that real estate sales in the Asian country have barely changed even after numerous support measures implemented by Beijing. According to the expert, the Chinese leadership should find ways to lower the rates on existing mortgages, closing the gap with the cost of new ones.

Larry Hu, an economist at Macquarie Capital Ltd., says that economic growth in the Asian country continues to be an extremely uneven process. In this context, the expert notes that exports and investments in the area of new energy continue to be the driving force of the mentioned dynamic. Larry Hu stated that consumer activity and the crisis situation in the real estate sector are risk factors in terms of prospects for continuing the implementation of the economic growth process. At the same time, the expert underlined that the slowdown in the positive economic dynamic in China is not critical. This means that the slowdown in the growth of the economy, according to Larry Hu, will not be an obstacle to achieving Beijing’s target for the relevant process in 2024. The expert also does not hold the opinion that the Chinese authorities should take major measures of economic stimulation.

Returning to the topic of Beijing’s efforts to normalize the situation in the real estate sector, it is worth noting that, in addition to the already mentioned clear of excess housing inventories, measures such as easing the rules for issuing mortgage loans are also provided in this case. Against this background, the municipal authorities of the Asian country began to buy unsold homes. There is a widespread opinion in the analytical environment that Beijing’s current measures to support the real estate sector are not large enough. Proponents of this point of view point out that trial programs in several Chinese cities have testified that progress may be slow. This opinion is not a kind of consensus view on the effectiveness of Beijing’s efforts to combat the crisis in the real estate sector, but it is quite widespread.

In a survey of more than 400 top executives conducted by UBS Group AG in April, it was found that the share of respondents planning to increase capital expenditures in the Chinese economic system in the second half of 2024 decreased compared to the result of the same period of 2023.

Helen Qiao, chief Greater China economist at Bank of America Global Research, says it is necessary to see new incentives. In this case, the measures taken by the authorities of the Asian country to activate the economic dynamic are meant. The expert says that without new stimulus, the growth rate of the world’s second-largest economy may show a strong weakening.

Bill Winters, CEO of Standard Chartered Bank, said in February during a speech at the World Government Summit in Dubai that Beijing faces a lack of trust. He noted that, in his opinion, it is the mentioned circumstance that is the main negative factor in the context of China’s economic problems. Bill Winters is also convinced that the Asian country’s economy is going through a large-scale transition period.

Serhii Mikhailov

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Serhii’s track record of study and work spans six years at the Faculty of Philology and eight years in the media, during which he has developed a deep understanding of various aspects of the industry and honed his writing skills; his areas of expertise include fintech, payments, cryptocurrency, and financial services, and he is constantly keeping a close eye on the latest developments and innovations in these fields, as he believes that they will have a significant impact on the future direction of the economy as a whole.