Can China's leaders deliver a soft landing for its troubled economy? That's a multi-trillion-dollar question facing a global economy whose growth has been spurred by decades of China's phenomenal rise.
But nothing lasts forever, and while the growth rates projected for the next few years (5% in 2024 and 4.5% in 2025) now look relatively close to the levels that countries such as South Korea and Japan enjoyed when they reached a similar level of development to China, the scale of China's influence remains much larger. Although China has made a remarkable recovery from the COVID-19 era recession, the shift to slower growth is a macroeconomic imperative.
A gradual slowdown in economic growth will not amount to a crisis. The fundamentals of the Chinese economy remain strong. Policymakers have long understood that a shift towards domestic consumption is necessary for China to enjoy sustained economic growth. Official statistics seem to indicate that this goal is still out of reach, but as Nicholas Lardy recently pointed out, once in-kind social transfers (including government spending on things like subsidized canteens) are taken into account, China appears to have achieved a significant rebalancing. The recent strong growth in disposable income (6.1% in 2023, above nominal GDP growth) suggests that there is still a path for this shift to continue.
But the rebalancing task faces a major obstacle: the real estate sector.
The bursting of a real estate bubble is almost a rite of passage for developing Asian countries. The macroeconomic impact of the end of a real estate boom varies widely across Asia. Thailand's burst is well known to have contributed to the 1997 Asian financial crisis, while Japan's is blamed for three decades of sluggish growth. But elsewhere in Asia, market corrections do not necessarily lead to crises. The hope for China is that it can weather the downturn in real estate and construction investment with minimal economic damage.
A real estate-led crash has been predicted by China bears for years. Their predictions finally seemed right when the troubled giant Evergrande ran into major difficulties in 2021 following the introduction of new prudential regulations on lending. But Evergrande's slow collapse did not lead to market-wide ripples, even though other big developers such as Country Garden and Sino-Ocean were also on the brink of insolvency. The real estate sector has fallen significantly, but there has been no overall financial crisis. The problem for policymakers is that the real estate sector plays such a central role in the Chinese economy that this downturn will deal a big blow to growth.
Recently, Beijing decided to take several policy measures to boost demand and halt the decline in the real estate market. It lowered mortgage interest rates, relaxed down payment requirements, and encouraged local governments across the country to buy up unsold homes and convert them into affordable housing. These measures aim to solve multiple problems at once: halting the decline in the real estate market, improving the balance sheets of developers with excess inventory, and providing new housing to those left out of the real estate market.
As Yuhan Zhang writes in this week's lead article, these measures are just scratching the surface of the structural reforms needed for China's economy to keep growing. Beijing needs to go further, Zhang argues. The real estate sector will not be able to contribute as sustainably to aggregate demand growth as it did before the pandemic, and other economic engines will have to pick up the slack if the economy is to continue growing at middle-income rates.
Zhang argues that reforms to hasten the shift towards domestic consumption, such as reforms to the social security and household registration systems, are an important part of the policy mix. As Sourav Gupta argued at the East Asia Forum earlier this week, fundamental fiscal reforms (potentially incorporating a switch to significantly more direct taxes and reforms to the way China's local governments manage their finances) should also be on the agenda.
The real question is whether Beijing has the political appetite for such a comprehensive reform agenda. As Sung-hyun Lee noted this week, “The intertwining of governance, ideology, and market dynamics under Xi Jinping has created a situation in which political decisions have a significant impact on economic outcomes.” The Communist Party of China Central Committee is scheduled to hold its third plenary session of the current term in mid-July, raising hopes that, as is tradition at third plenary sessions, a major strategy for economic growth will be outlined. While the significant delay in the meeting’s schedule bodes ill, Xi Jinping has been meeting prominently with private sector figures in the run-up to the meeting, suggesting that the agenda may include reformist content.
Although the real estate sector's problems are serious, they do not portend a more general crisis for the Chinese economy, which still has considerable room for growth in the future, despite an unfavorable international environment and rising protectionism in many developed countries.
The EAF Editorial Board is located in the Crawford School of Public Policy, School of Asia and the Pacific, Australian National University.