How Much is China’s Property Market Weighing on Its Economy?

(Yicai) Sept. 8 — China’s growth this year has been weaker than expected as its economy has been hit by two severe shocks. 

First, tight monetary policy in its trading partners is depressing consumption and, as a result, the demand for China’s exports. Figure 1 shows that the volume of retail sales in the US and the Euro Area has been trending down for the last year and a half. 

Figure 1

Of course, Chinese exporters are not alone in having to manage these challenging conditions. Those from other countries are in the same boat. However, Chinese firms are holding their own in key markets like the European Union, which has been purchasing 21 percent of its imports from China, up 3 percentage points from pre-Covid levels (Figure 2). These data suggest that there is nothing wrong with China’s export sector and that sales should rebound once foreign demand stabilizes. 

Figure 2

Data released by the National Bureau of Statistics (NBS) allow us to quantify the impact of weaker net exports on China’s GDP growth. The NBS estimates that net exports subtracted 0.6 percentage points from growth in the first half of the year. In other words, if monetary policy in China’s trading partners had been neutral, China’s GDP growth would have been 6.1 percent instead of the 5.5 percent actually recorded.

The second shock from which the Chinese economy is suffering is a domestic one – the downturn in the property market. 

To some extent, this shock was policy-induced. In August 2020, the government introduced guidelines to keep the growth of developers’ liabilities in line with the strength of their balance sheets. Subsequently, the pandemic reduced households’ willingness to shop for apartments. This exacerbated developers’ liquidity squeeze, as a large proportion of buyers typically pay for their apartments before they are built. Such pre-sales had provided developers

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