China’s recovery has regained momentum, with real GDP growth reaching 5.2% in the first three quarters of 2023. Solar cell, service robots, and integrated circuits production increased by 62.8%, 59.1%, and 34.5% respectively in October 2023. Infrastructure and manufacturing investments expanded by 5.9% and 6.2% in the first ten months, offsetting the 9.3% contraction in real estate investment. Private investment grew by 9.1% outside the real estate sector. Consumption saw a strong rebound, but exports fell by 6.4% year-on-year in October 2023. However, China’s automobile exports are expected to exceed four million units by the end of 2023, marking a milestone in industrial upgrading and the move towards the higher end of the value-added chain.
The Chinese economy is facing a real estate crisis, prompting the need for restructuring through Beijing’s 2020 ‘three red lines’ policy, with the current housing sector slowdown a deliberate policy choice. Financial risks will likely be contained due to four reasons: direct bank financing for real estate developers accounts for 2.5-3% of total bank loan balances, home buyers account for 80% of housing-related debt, real estate prices are monitored by the government, Chinese companies are not primarily using real estate as collateral, The People’s Bank of China and state-owned asset management companies can provide the necessary liquidity or capital.
The real estate sector in China has experienced a significant decline, with its balance sheet shrinking by 1.7 trillion yuan (US$240 billion), a mere 1.4% of GDP. However, the sector is expected to stabilize due to supply and demand policies. Credit is being directed to developers to complete unfinished housing projects, while relaxations in down payment, reduced mortgage rates, and property sales tax rebates are incentivizing home buyers. However, the real estate sector will remain subdued due to slowing urbanization and population growth. To replace the outsized investment in the real estate sector, China must continue investing in research and development, producing productivity-driven growth, and boosting household consumption. The government’s July 2023 31 Point Plan may reassure entrepreneurs that the government will continue to provide financial resources and market access to the private sector.
The central government should implement a job guarantee program, creating local jobs funded by the central government, which could employ youth and provide skills training to meet private sector demand. This would alleviate youth unemployment and boost consumer confidence. The government should also increase financing support for local governments, who are struggling with crippling debt due to the economic slowdown and limited land sales. The government should consider raising fiscal transfers to help them manage debt counter-cyclically. The recent issuance of one trillion central government bonds for fiscal transfers is a good first step, but the magnitude needs to be larger. China’s economy is still growing, and the government has multiple policy tools to guide and support it.
