Can China’s leaders stitch up a soft landing for the troubled Chinese economy? This is the multi-trillion-dollar question facing the global economy, whose growth has been boosted by China’s extraordinary rise for decades. 

But nothing lasts forever and the growth rates being projected for the coming years — 5 per cent in 2024, 4.5 per cent in 2025 — now look relatively similar to the levels that countries like South Korea and Japan enjoyed when they reached the level of development that China is now at, although the scale of China’s impact is still much larger. Despite China’s impressive recovery from the COVID-19 era recession, a shift to slower growth is a macroeconomic inevitability.

A gradual slowdown in economic growth does not amount to a crisis. The fundamentals of the Chinese economy remain good. Policymakers have long understood that a shift towards domestic consumption was necessary if China was to enjoy sustained economic growth. And while the official statistics seem to suggest that this goal remains out of reach, as Nicholas Lardy pointed out recently, when social transfers in kind (including on government spending like subsidised canteens) are taken into account, China does appear to have achieved substantial rebalancing. Recent substantial growth in disposable income — 6.1 per cent in 2023, higher than nominal GDP growth — shows that this shift still has some way to run.

But the rebalancing agenda faces one major roadblock: the real estate sector. 

Popping a real estate bubble is almost a rite of passage for developing Asian economies. The macroeconomic consequences of the end of a real estate boom have been quite different across Asian economies. Thailand’s real estate collapse famously contributed to the 1997 Asian Financial Crisis and Japan’s busted real estate mania has been blamed for its sluggish growth for three decades. Elsewhere in Asia, though, market corrections have not necessarily led to crises. The hope for China is that it can steer through the downturn in property and construction investment with minimal economic damage.

A property-led crash has been predicted by China bears for years and when the troubled giant Evergrande ran into major difficulties in 2021 following the introduction of new prudential regulations on lending, it seemed like they were finally right. Evergrande’s slow motion collapse, however, did not lead to a general market contagion even though some other major developers, like Country Garden and Sino-Ocean, were also teetering on the edge of failure. There has been a considerable downtown in the property sector, but no general financial crisis. The problem for policymakers is that with the real estate sector playing such a central role in the Chinese economy, this downturn will be a major hit to growth.

Recently Beijing decided to step in to halt the slide in the property market with a number of policy measures designed to increase demand: it has cut mortgage rates and loosened requirements for down payments, as well as encouraged local governments around the country to buy up unsold dwellings and convert them into affordable housing. The measures are designed to solve a number of problems at once: arresting the slide of the real estate market, improving the balance sheets of developers with excess inventory, and offering new supplies of housing to those who have been left out of the property market. 

As Yuhan Zhang writes in this week’s lead article, these measures only scratch the surface of the structural reform that the Chinese economy requires to keep growing. Beijing, Zhang argues, needs to go much further. The property sector cannot sustainably contribute as much to growth in aggregate demand as it did pre-pandemic and if growth is to continue at reasonable middle-income country rates, other economic drivers will have to take up the slack. 

Reforms that hasten the switch towards domestic consumption, like reforming the social security and household registration systems, Zhang argues, are an essential part of the policy mix. Fundamental fiscal reform — potentially incorporating a major tax mix switch to direct taxes, as well as reforming the way in which local governments in China finance themselves — also deserve to be on the agenda, as Sourabh Gupta argued in East Asia Forum earlier this week. 

The real question is whether the political appetite exists in Beijing for such a comprehensive reform agenda. As Seong-Hyon Lee pointed out this week, ‘the intertwining of governance, ideology and market dynamics under Xi presents a landscape where political decisions profoundly influence economic outcomes.’ As the Central Committee of the CCP holds the Third Plenum of its current term in mid-July, expectations are high that, as in the tradition of third plenums, a major strategy for economic growth might be outlined. The long delay in scheduling this meeting is a bad omen, but Xi Jinping has used the lead-up to the conclave to conspicuously meet with figures from the private sector, suggesting that the agenda might have some reformist substance.

The troubles of the real estate sector are serious, but need not presage a more general crisis for the Chinese economy, which, despite the unfavourable international environment and rising protectionism in much of the developed world, still has considerable room for growth into the future.

The EAF Editorial Board is located in the Crawford School of Public Policy, College of Asia and the Pacific, The Australian National University.