Think tank highlights China’s economic woes amid real estate crisis, reduced spending

A London-based independent think tank has highlighted the severity of the economic downfall faced by Beijing and claimed that the Chinese government is still not ready to make major changes to its economic policy as discussed in its high-profile Third Plenum recently.

The Chinese economy has continued to struggle throughout the year, showing no hopes of a strong-paced post-pandemic recovery, which was predicted by many analysts. The reopening boom after Covid never became real for China.

According to the report by the think tank OMFIF titled, “How deeply rooted are China’s economic woes?,’ the country’s economic trajectory can be traced back to four major issues.

As the real estate market is in a protracted downturn, Chinese consumers have held back their spending after the economy reopened. Deteriorating local government finances threaten a sharp slowdown in investment and China’s private sector remains weak after the policy crackdowns over the past several years.

The report further mentioned that the housing market in the country is in shambles due to millions of unsold apartments and bankrupted real estate developers. Additionally, homebuyers have been witnessed losing confidence that the pre-sold units will be delivered on time and prices will not fall further.

Decades of excessive investment into the property market stretched the balance sheets to a breaking point which meant that the real estate market was headed for a painful adjustment irrespective of the government’s policy.

However, to counter the situation instead of using a gradual rebalancing, the Chinese government abruptly pushed the housing market into sharp correction through its strict Covid-19 lockdowns and poorly designed policies such as the ‘Three Red Lines’.

The OMFIF report claimed that the government’s rescue plan for the housing market like buying up vacant apartments, has yielded inadequate results given the massive scale of the housing problem. The housing sales in 2023 were lower than 2017, and the sales in 2024 are on an even lower trajectory. Furthermore, real estate is unlikely to regain its former role as a catalyst for economic growth.

Post-pandemic China reopened but private consumption recovered much slower than what economists had anticipated.

Currently, Chinese homeowners face a negative wealth effect, with their net worth declining due to a downfall in property prices. This alongside growing concerns over high unemployment among the youth, the Chinese populace is being prompted to cut back on their spending.

The report further mentioned that to date the government’s policies to promote consumption have been small-scale. Moreover, instead of sending direct financial support to households in the country as stimulus checks or improving the social safety net which could have likely spurred new spending. The Chinese government has instead pushed rebate programmes and efforts to promote ‘consumption upgrading’.

Local administrations, which play a significant role in driving the economic activity of the country, have been spending themselves thin on infrastructure and services, way more than the budgets could handle. To bridge the gap, they use government financing vehicles to issue debt, a method that borrows money from creditors, mostly through selling bonds into the securities markets.

According to the International Monetary Fund (IMF), China has funded over USD 3.8 trillion in infrastructure spending through off-balance sheet borrowing since 2018, the OMFIF report claimed.

Moreover, the consequences of this borrowing move have caused financial instability. The business environment is the final major factor impacting China’s growth. Yet, since 2015, Chinese President Xi Jinping has pursued policies that have systematically benefitted state-owned companies at the expense of the private sector.