The ghost of housing crash haunts China's economic forecast

The adage "We make our choices, and then our choices make us" is apt particularly in light of China's current economic conditions. The world's second-largest economy finds itself navigating troubled waters, with its growth rate for 2023 pegged at an uncharacteristically low 5 percent and the World Bank's estimate of a 4.4 percent growth forecast for 2024 painting a rather bleak picture. It is a stark departure from the rosy 4.8 percent projection made just a few months ago.

Moreover, another looming financial storm is brewing, centred around none other than China's largest private property developer, Country Garden, which has been fighting to avert default. The realtor’s woes are intimately tied to a property market that constitutes a staggering 30 percent of China's GDP, making it the single most influential sector in the world's second-largest economy. It is safe to say that when the housing market sneezes, China catches a cold, and the rest of the world may very well end up with a fever.

China's economic struggles have ramifications that stretch far and wide. The World Economic Forum has estimated that every one-percentage-point decrease in China's GDP translates to a 0.3 percent decline in global GDP. In a world that's more interconnected than ever before, China's economic health is not just a domestic concern but a matter of global significance.

Chinese President Xi Jinping's approach to this crisis is different from his predecessor's response to the 2008 property downturn. Instead of pumping cash into the sector to stage a bailout, Xi seems keen on a different strategy: using bank capital to complete ongoing construction projects but with a crucial caveat—this capital cannot be redirected elsewhere. The intention is clear: keep the housing market afloat and steady the ship. But can such a strategy ensure long-term stability in an environment where housing is seen as more than a speculative asset rather than a basic necessity for millions of Chinese citizens?

It partly stems from China's attempt to relinquish the reliance on the property sector with its 'three red lines' policy against many delinquent real estate companies recklessly borrowing and stopping paying their bills. The crack-down limited the ability of real estate companies to raise money, which prompted a series of defaults. The reckless expansion by companies by selling property before finishing off the projects puts markets, investors and home buyers in jeopardy. The priority should now be ensuring buyers receive the apartments they paid for.

It is a monumental task, given the sheer scale of resources required to make housing serve its urban and social purposes rather than be a playground for speculators. Therefore, the core issue at hand extends beyond the immediate rescue of the housing sector; it pertains to revitalising the entire Chinese economy to withstand the strain.

The time for proactive and innovative solutions has never been more critical. The nation's economic giants must shift their focus away from traditional growth locomotives and instead embrace new strategies to salvage the economy. Beijing must harness the power of its burgeoning consumer base and nurture innovation within the private sector. Such a dual-pronged approach can usher in cyclical and structural transformations essential for China's economic revival.

China's economic woes can be traced to a twofold crisis – a structural issue rooted in entrenched investment patterns and a cyclical problem marked by dwindling consumption. Acknowledging this, the 20th National Congress rightly emphasised the pivotal role of consumption and government investments in driving economic growth. However, it appears that the policies so far have fallen short of delivering the desired impact.

Measures such as interest rate cuts on yuan deposits and various consumption-boosting initiatives, including subsidies for automobiles and home appliances, extended restaurant hours, and promoted entertainment activities, have failed to alter consumer spending habits significantly. A more holistic approach is required to breathe life into China's economy. Steps include enhancing public services, bolstering social benefits, empowering workers with better bargaining power, and introducing measures to allocate stocks of State-Owned Enterprises to the public.

Yet, implementing these measures is not without challenges. Asset-rich local governments may bear the brunt of the welfare redistribution and its likely impact on businesses. This move could be met with resistance, especially in the backdrop of the ongoing municipal debt crisis. Nevertheless, these bold steps are necessary to redirect China's economic trajectory.

In addition to addressing consumption concerns, recent efforts to bolster private businesses by improving property rights and fostering fair market competition are commendable. These can instil greater confidence in the private sector, encouraging technological innovation and market participation. It can also inject fresh vigour into China's economic engine if it translates into better private-sector involvement.

However, the spectre of a housing crisis looms large, posing significant challenges to China's real and financial sectors and beyond. With approximately 70 percent of household wealth tied to real estate, any slowdown in this sector impacts the broader economy. Whether the existing and potential policies can mitigate the repercussions remains uncertain.

Although China’s response to these multi-pronged challenges remains uncertain, one thing is clear: bold and innovative policy measures are the need of the hour. To save the economy from the lion's mouth, China must act decisively, harnessing the potential of its consumers and empowering its private sector. It’s not an easy task but it’s not impossible either.