Credit By: CNN
As the housing crisis continues to cast a shadow over China’s economic growth trajectory, a dramatic change is taking place. The World Bank’s updated predictions for 2024 GDP growth, which lowered it from 4.8% to 4.4%, reflect the significant effects of high debt levels and problems in the real estate industry. This article examines how the decline in the real estate market has impacted China’s economy and considers its structural implications.
Impact on GDP Growth:
Historically, infrastructure and real estate investments have been key drivers of China’s growth. However, the rapid growth has left these industries heavily indebted. According to the World Bank, China’s total domestic non-financial debt-to-GDP ratio will double from 132% in 2007 to 285% in 2023.
Defaults and Unfinished Homes:
In 2021, private developers stopped making payments on their debts as a result of reform and deleveraging initiatives in the real estate industry. This set off a series of events that left numerous incomplete homes and unpaid invoices to suppliers and creditors. Since property makes up over a third of China’s GDP, the crisis has an impact on every sector of the economy.
Systemic Effects and LGFVs:
Local government financing vehicles (LGFVs) and the real estate sector have a higher exposure for smaller regional banks than they do for the overall loan book of onshore banks, which accounts for just over 5% of Chinese lending to property developers. These organizations, which were developed to get around constraints on borrowing by local governments, have flourished and exacerbated the situation.
Policymaker Reaction: Since 2016, policies have been directed by President Xi Jinping’s tenet that “housing is for living in, not for speculation.” Recent indications, such as the removal of this language from a July statement, however, point to a potential U-turn. Since August, easing measures have been implemented with the goal of stabilizing the market, but the lack of a firm response suggests internal conflicts.
Long-Term Prospects and Economic Impact:
As China’s internal budget deficits have grown, future investment and GDP growth have been constrained. Long-term prospects for the industry face obstacles such as slowing urbanization, declining population growth, high rates of home ownership, and a hidden inventory of vacant properties.
Different experts have different ideas about how China’s real estate market will develop. The “golden period” is still important as a pillar of the national economy, even though some people, like Li Daokui, think it is finished. Yao Yang contends that short-term strategies addressing long-term objectives are to blame for the current slowdown and suggests that it is only transitory. Yang said that prompt policy changes might raise hopes and boost confidence.
The economic repercussions of China’s prolonged real estate crisis are starting to become more obvious. The complexity of the problem is highlighted by the dynamics of the real estate market and its intertwined links with debt, local banks, and government funding bodies. As they navigate between short-term solutions and long-term economic viability, policymakers must strike a difficult balance.
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