China’s property problems appear poised to improve, but can ‘much more risky’ real estate still drive economic growth?

Real estate also became a major source of local government revenue, and it sent private property tycoons to the top of China’s rich lists.

And all the while, soaring property prices made homes less affordable to the average person.

But in recent years, the feast came to an abrupt end. Out of concerns that the property market was overheating, President Xi Jinping declared in 2017, that “houses are for living in, not for speculation”, and that oft-repeated sentiment served to shape policy in the years that followed.

And in late 2020, relatively early in the pandemic, Beijing took drastic steps to limit the property sector’s high leverage – restricting how much developers could borrow annually by capping their debt.

The policy shift served to choke the liquidity of many private developers, led to snowballing bond defaults, and pushed some developers to the brink of collapse, with Evergrande Group at the centre of the crisis. Property development ground to a halt, and local governments struggled to cope with a sharp drop in revenue due to weak land sales.

The crisis also compounded the risks of bad loans in banks and fuelled concerns among millions of buyers that developers would not be able to deliver flats. This became a major source of financial risks and social instability – even dampening the nation’s post-Covid recovery and pushing Beijing to loosen its grip over the property sector.

“Before the pandemic, Chinese companies, especially listed ones, held a lot of properties. They were not only high-value fixed assets that enabled us to get loans for business expansion, but they could also bring more profits than our main business,” said Wang, who made his fortune by investing heavily in large photovoltaic projects across the country.

“Housing prices have fallen back to the level of 2018 and 2019,” he added. “We will not sell the real estate we have on hand, because we still need them as fixed assets … But we also have no plans to invest in new properties.

“Profits in our industry are becoming flat … and investing in real estate is even becoming less profitable [and] much more risky.”

Private businesses – the backbone of growth, job creation and innovation in China, as well as major players in the real estate sector – were hit hardest during the pandemic. Beijing implemented large-scale lockdowns of major urban areas, cracked down on tech companies, upended the nation’s tutoring industry, and squeezed the property market.

Confidence rapidly waned among consumers, investors and businesspeople. And it has yet to substantially rebound in a post-Covid climate, as the private sector has lagged behind state-owned enterprises in terms of growth this year.

With bank property loans billed as the “biggest grey rhino risk” in the financial system by former top banking regulator Guo Shuqing in 2020, economic officials have been walking a fine line between lifting economic recovery and mitigating the impact of a prolonged property crisis on the financial system.

“The biggest issue for economic policy, however, is the speed of the retreat in the old growth drivers – mainly property,” said Wei He, an analyst with Gavekal Dragonomics.

In 2022, real estate and related industries accounted for 13-14 per cent of China’s overall economy. Property investment, which accounts for at least one-fifth of all fixed-asset investment, dropped 10 per cent last year, dragging down the overall investment total by 2.7 percentage points.

Fixed-asset investment, a major gauge of economic activities, rose by 3.8 per cent in the first six months of this year, compared with the same period in 2022, while property investment fell by 7.9 per cent. Private developers account for 80 per cent of all property investment in China.

Private-sector investment contracted by 0.2 per cent during the same period, as the private sector’s share of fixed-asset investment hit a record-low 52.9 per cent.

Many analysts blamed the beleaguered property market for China’s disappointing economic performance in the second quarter. And some have warned that a prolonged property crisis would threaten Beijing’s economic-growth target of “around 5 per cent” this year, which had been widely viewed in March as modest and easy for China’s new leadership line-up to achieve in the first year of Xi’s third presidential term.

But what a difference a few months have made. Beijing’s growth outlook has become increasingly murky amid geopolitical strife and uncertainties, with US-led tech-containment measures and more vocal calls to “de-risk” from China.

“China is facing pressure to realise economic growth at 5 per cent,” said Mao Zhenghua, director of the Institute of Economic Research at Renmin University. “At the same time, it has to bear dual shocks at home and abroad. We need arduous efforts to reverse the downward trend of economic growth over the medium to long term. We are going to face a more complicated economic situation over the long run.”

“We are paying the price for the property bubble, which saw persistent price hikes over the years, and this is the only way for China to reduce its reliance on real estate. I do not think any measures are available to remake it as a pillar of the economy,” Mao said at a seminar held by Renmin University earlier this month.

Second- or lower-tier cities have been loosening years-long home-purchasing restrictions since late last year. Regulators have also loosened financing regulations on property developers. And the central bank has said there is “marginal room to optimise” property policies.

On July 19, Beijing unveiled a 31-point action plan and promised political backing for the private sector in a bid to reinvigorate the private economy and stem downward risks of overall economic growth. It also introduced measures to stimulate household consumption.

But the strongest signal for course correction in the property sector came last week from the Politburo – the prime decision-making body of the Communist Party. In a quarterly economic assessment meeting last Monday, it noted that there had been “a major change in the supply-demand situation” in the real estate market, and indicated that restrictive policies would be further relaxed.

Viewing China’s economic recovery as a process of “waves and zigzags”, the Politburo noted that domestic demand was insufficient, with “many hidden risks in key areas”, and that the country was facing “a complex and serious external environment”.

Zhong Zhengsheng, chief economist with Ping An Securities, noted how it was “critical to revitalise confidence in the private sector”, particularly in terms of advanced manufacturing.

“And an increase in private investment is highly correlated with the adjustment in property policies and measures to address risks in the real estate sector,” he said. “But fundamentally, a revival of private-sector confidence lies in expanding domestic demand.”

Meanwhile, most analysts expect that regulators will continue to refrain from strong stimulus measures, amid concerns that these could further inflate the property bubble.

“The government does not want to solve today’s problems by just creating a bigger bubble to deflate in the future,” said Wei at Gavekal Dragonomics.

By digging into its monetary toolbox, Beijing could further cut mortgage rates and further relax purchase restrictions in cities. It could also opt to implement another round of renovations involving “urban villages”, or shanty towns, in major cities. The last such around was in 2015.