The world is watching China’s economy heading for historic slump


“In the event of a longer-lasting zero COVID policy in China or a much deeper real estate slowdown, GDP growth in 2022 could drop to 4%,” said Tao Wang, chief economist for China at UBS, in a note.

China’s real estate sector is the biggest question mark in the economy due to its enormous scale – more than 900 million square meters of apartments are built each year, according to official data.

This investment, as well as the production of related sectors such as steel and cement production, represent between 20 and 25% of China’s GDP, economists estimate. Any slowdown – or outright decline – in real estate development would leave a void in the economy that expansion into no other sector could easily fill.

The Chinese real estate sector is the biggest question mark on the economy.Credit:Getty Images

“The slowdown in real estate in China is a major headwind for the global economy as it is likely to be the biggest headwind for the Chinese economy next year,” said Larry Hu, chief economist for China at Macquarie Group.

Real estate construction fueled China’s V-shaped economic recovery from the pandemic, but the sector contracted this summer after Beijing orchestrated a mortgage slowdown that brought real estate developers such as China Evergrande Group to the edge of bankruptcy.

The most dramatic drop was seen in newly launched housing projects, the steel-intensive part of real estate development, which fell more than 33% year-on-year in October, the largest drop on record.

Real estate developers get most of their financing by selling houses to households before they are built. A decline in mortgage lending and growing pessimism in the household real estate market are causing sales to fall.

China’s real estate sector is the biggest question mark in the economy due to its enormous scale – more than 900 million square meters of apartments are built each year, according to official data.

While the People’s Bank of China announced a slight increase in mortgage lending in October, “the government is not rushing to revive even if housing starts collapse,” said Rosealea Yao of Gavekal Dragonomics. Beijing’s recent announcement of trying a property tax to discourage home buying as an investment will further hurt sales confidence, she added.

As a result, several economists are forecasting a 10% drop in new housing starts next year. But because Beijing is concerned about the risks to social stability if developers are unable to complete pre-sold projects, officials will try to ensure existing projects are completed. This means that overall investment in real estate could increase next year even if sales and housing starts decline.

Morgan Stanley projects real estate investment growth of 2% next year, which would be down sharply from an 8% rate before the pandemic. Others, like UBS, are more pessimistic and forecast a 5% drop.

Slowdown could last for years: Goldman Sachs expects the housing sector to reduce GDP growth by 1 percentage point per year through 2025.


Although Beijing has a lot of control over the housing market, there is still a possibility that the slowdown has some self-reinforcing momentum that could be difficult for authorities to control, leading to an even sharper slowdown than more pessimistic forecasts. For example, Chinese households tend to avoid real estate purchases when prices fall, which can lead to lower sales and more price cuts.

If Beijing is serious about resolving imbalances in the real estate market, it would require a “multi-year slowdown in construction activity, which will certainly slow the economy given the weight of the real estate sector,” said Logan Wright of Rhodium Group. “Much still depends on what Beijing will do in the coming months. “


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