China Currents

Getting Real: China looks beyond real estate for economic success

Johnny Yu, CFA, Fixed Income Portfolio Manager
Han Sia Yeo, Macro Strategist
2024-11-30
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The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.

China’s reopening did not translate into the economic boom in 2023 that many had anticipated. We attribute this deviation from projections to the ongoing challenges within the real estate sector, a prevailing lack of confidence among Chinese consumers, and small to medium-sized enterprises following the implementation of stringent zero-COVID policies.

We believe the primary stumbling block on China's economic path remains the intricate web of issues within the real estate sector. Nevertheless, we see indications that the domestic economic cycle may be nearing its bottom, providing hope for improved long-term performance. A notable development is the uptick in producer and consumer goods prices, albeit modest, after a long period of falling prices in the depths of the COVID-zero policy. This price resurgence likely mirrors a restocking trend as the economy tentatively embarks on its recovery journey.

The consumer is also showing tentative signs of more confident behavior, though significant reluctance to participate in real estate remains. According to the National Bureau of Statistics, retail sales of services grew 20.3% year-over-year for the January to July period, versus a mere 7.3% growth for overall retail sales.

Additionally, there were signs of some amount of policy support earlier this year, which eventually should help the economy find a floor. In July, for example, the Politburo— a pivotal decision-making body within the Communist Party — released a policy memorandum promising more counter-cyclical fiscal measures. Implementation details are to be announced but could include moderate support for new housing development. The National Development and Reform Commission (NDRC) also released domestic consumption support policies. Lastly, various monetary policy rates and mortgage policies have been eased to support the real estate sector and the broader economy.

Beyond the immediate horizon, it is evident that China is actively repositioning itself away from an overreliance on infrastructure and real estate-driven growth. This fundamental shift in policy orientation underpins the reluctance of policymakers to offer extensive support to the real estate sector in recent years. Instead, China has sown the seeds for long-term economic success in other pivotal global industries, such as the automotive and solar panel sectors. From our perspective, China's burgeoning achievements in these areas offer a potential trajectory for sustaining economic dynamism.

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Yied differential

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