The Astonishing Reorientation of the Chinese Economy

From Real Estate to Industrial Development Within Five Years

Jason Smith on Twitter

Throughout the 2010s China was experiencing a quite colossal residential real estate boom, including extremely bubbly price appreciation, which toward the end of the decade the Party-state was striving to deflate in a controlled manner. From the turning of the decade onwards, it has been very successfully deflated. The sheer scale of the reduction in real estate activity is detailed by professor Huang Qi Fan of Fudan University:

After more than twenty years of development, China’s real estate market has undergone major “adjustments” in the past four years—from 2021 to 2024 … When discussing real estate, five indicators are typically mentioned.

The first indicator is the total construction volume of real estate, including residential and non-residential properties. In 2020, it was 2.2 billion square meters, while the total data for 2024 is not yet available but based on the data from the first eleven months and estimating one more month, it is over 600 million square meters …

The second indicator, aside from construction, is the sales of completed homes. In 2020, new home sales were 1.8 billion square meters, while last year’s sales volume was 500 million square meters, which is also a decline of about 60%. That’s two indicators, each down over 60% …

The third indicator is land leasing volume. In 2020, national land leasing amounted to 8.7 trillion yuan, while the estimate for 2024 is around 3 trillion, which is still relatively optimistic. From January to October, the land leasing volume was actually over 2 trillion. Even if the last two months add another trillion, it would just exceed 3 trillion. In summary, 8.7 trillion minus over 5 trillion is about a 30% reduction …

The fourth indicator that everyone is concerned about is housing prices. Overall, housing prices have dropped by 40% to 50%. By the end of 2024, the figures are not yet out, but as of November, the national statistical indicators show housing prices have dropped by 40% compared to 2020. Some places have dropped a bit more and some a bit less, etc …

The fifth indicator is that real estate has historically accounted for 45% of all financing in China’s financial system. Last year, the public’s desire to buy houses significantly decreased, leading to a 50% annual reduction in mortgage loans compared to 2020. Developers want funds, but their credibility is poor and their debt levels are extremely high, so banks are hesitant to lend large amounts to developers. Consequently, developers’ financing abilities have also weakened significantly, with a reduction of about 50%.

In summary, among the five indicators, three have dropped by two-thirds, and two are down nearly 50%. In this sense, you can certainly say that China’s real estate market has undergone a very serious adjustment, the most severe in 20 years.

Real estate construction (residential and non-residential) down from 2.2 billion sqm to 600 million, new home sales down from 1.8 billion sqm to 500 million, land leasing down from 8.7 trillion yuan to 3 trillion, house prices down 40%, and residential real estate financings down 50%. In the West such huge falls would be expected to feed into a major financial crisis and a deep economic recession. But not in China, which also weathered the COVID pandemic in parallel while GDP growth remained positive (2021: 8.4%; 2022: 3%; 2023: 5.2%; 2024: 5.4%) and the economy grew a cumulative 23.8%. With population to all intents and purposes static, that means that average GDP per capita increased by nearly a quarter in those four years of a massive real estate crash. The price to incomes ratio of real estate was halved in four years, fulfilling the Party-state’s goal of making housing much more affordable to China’s younger generation.

As Huang details, China never allowed for things such as sub-prime mortgages, zero down payments and widespread securitization to infest and undermine the Chinese financial system. It was such things that both created greater risks within the US housing finance sector, and when the crisis hit rapidly transferred and intensified it across not just the US but the whole Western financial system.

the Chinese government has always been clear-headed and has never allowed any local government or enterprise to offer zero down payment for homes. If there were any violations allowing zero down payment, they would be immediately shut down upon discovery.

Second, various bad debts in China’s real estate sector have never been bundled together to issue bonds that would enable high leverage.

In summary, if there are bankruptcies in real estate, they will be the bankruptcies of individual companies. If there are bad debts, they will be localized; there is no multi-fold leverage turning into bad debts in the financial market, nor is there a frenzied high leverage or zero down payment scheme for the public to buy homes, creating numerous bubbles.

Even if there are problems in China’s real estate sector now, they are issues of excessive inventory, inventory reduction, and high debt ratios of real estate companies. In short, we should not confuse China’s real estate issues with those of the U.S. or the subprime mortgage crisis, imagining how terrible it could be. This kind of thinking only leads to self-inflicted disarray and exaggeration of the situation.

The Party-state did not allow short-term profiteering and speculation at the cost of the stability of the financial system. In addition, much of the price appreciation did reflect the phenomenal growth in real incomes in the first two decades of this century, while at the same time the country was rapidly urbanizing. It was only in the 2010s that this started to take on the characteristics of a bubble.

China’s experience is also nothing like the Japanese experience which was the result of both an intentionally constructed bubble and crash and outright economic warfare by the US against Japan. This documentary details the intentional crash engineered to steer Japanese society away from its development state apparatus and toward a neoliberal future.

There will be no three decades of stagnation and increasing neoliberalism in China. At the time of its real estate and economic crash, Japan was fully urbanized. In contrast, China is still only half-way to full urbanization at 48%; “over the past few decades, it has increased by 30 percentage points, and it can still increase by another 30 percentage points in the coming decades”. Western critics who point to “ghost cities” and “ghost infrastructure” should understand this, there is still massive future pent up demand that can fill up the empty real estate at the right price. The Chinese investment was not wasted, it will become very fully utilized.

In 2024 Chinese house prices fell 8.5% and are expected to fall at a slower pace this year. With real incomes continuing to rise at 5% a year, a continuation of this trend through the balance of the decade will see a further reduction of the housing price / income ratio of over one third. Add in very mild inflation and that could easily be close to a halving.

In China, in 2020, it took 23 to 30 years of household income to buy a home, according to national statistics; globally, it’s generally 7 to 10 years of household income for a family to purchase a home.

That 7-10 years is itself inflated by the widespread bubble in Western house prices, greatly exacerbated by the loose monetary and fiscal policies during and after the COVID pandemic. In 2024 that Chinese house price to income ration is now more like 15 years, significantly down but still too high. With a further halving by 2030, the ration would be 7.5. On a par with the West, but still too high. Another five years and the ratio could easily be in the historical norm and affordable level of 4-5. The Party-state would have achieved affordable house prices for the younger generation without a financial or economic crash. Then real estate prices can track increases in household income. The Party-state can be expected to use its dominance of the financial system, and its lack of neoliberal ideological blindness, to keep household property lending and therefore prices in check.

At the same time, the Party-state is looking at buying up large amounts of unsold homes to provide affordable rental units. More from Huang:

China’s urban-rural integration will provide a foundational demand for residential real estate development in the next 20 years. The demand is still there and will gradually be released … [in addition] various [government] departments have laid out at least five measures …

The first measure is that the government initially allocated 300 billion yuan last year, and by the end of September, it clearly announced an allocation of 3 trillion yuan. I estimate that by next year, there will be another 3 trillion yuan, or even 6 trillion yuan in total. Ultimately, there will be tens of trillions, or even 100 trillion yuan, to acquire the inventory in real estate …

If our country invests tens of trillions, housing prices are currently discounted to about 60% or 70% of their normal prices. At a 60% discount, 1 trillion yuan could buy 1 billion square meters, but now it could buy 1.6 billion square meters, allowing for a significantly greater purchase of homes …

Any country should have such public housing. Public housing is for the residents and urban citizens; Hong Kong has 50%, Singapore has 70%, and typical countries have about 20%-25%. Our country has also clearly stated the goal of establishing around 20%-25% of state-owned affordable housing for the public. Over the past few years, due to the overheating of the real estate market, the government’s affordable housing only accounts for 5% of the total demand …

With a population of 1 billion, if we assume that 200 million people need government-subsidized housing, requiring about 20 billion square meters at 10 square meters per person, and currently, we have only 5%, we need to add another 15-16 percentage points, which means purchasing 10 billion to 20 billion square meters. If the government acquires this 20 billion square meters, it can provide housing for 200 million urban residents—whether migrant workers needing rental housing or recent graduates who cannot afford to buy homes. This would serve as a safeguard.

So it is obvious that the Party-state will use this opportunity to establish a sizeable stock of public housing, with its purchases greatly aiding the cash-flow of the residential real estate construction sector. The Party-state is also allocating several trillion yuan to support local governments in upgrading dilapidated buildings; providing demand for the residential construction sector. From 2025 onwards the property sector will no longer act as a drag upon the economy.

At the same time as property investment levels collapsed, the investment in productive assets has risen to fill the gap; driven by Party-state policies focused on economic and industrial upgrading. As this CNBC article notes:

“Unlike other economies that went through a wrenching adjustment in their housing market, China’s investment rate isn’t falling,” HSBC’s chief Asia economist Frederic Neumann and a team said in a report Friday. “Instead, [capital expenditure] is shifting towards infrastructure and, importantly, manufacturing.”

China’s investment levels did not fall with the property crash, they were reoriented toward productive investments, as with the phenomenal increase in the size of the Chinese electric vehicle industry in the past few years. Or the massive drive to overcome US high technology export restrictions. This switch in the nature of Chinese investments is why Western state and media actors keep wailing on about “Chinese over-capacity”. China is now very successfully investing to be the high technology leader of the 2030s, with the over capacity being in Western defunct capacity such as the many internal combustion engine manufacturing sites. Or the Western oligarch-profiteering approach to AI. As the CNBC article goes on to note:

Despite widespread attention on whether Beijing would bail out the property sector, real estate got no mention in the finance ministry’s spending plans, and limited attention in a ministry-level press conference about the economy during the parliamentary meetings. Instead, the housing minister was included in the lineup for a press conference about people’s livelihoods.

“Supporting the modernization of the industrial system” came first in the finance ministry’s report, followed by “supporting the implementation of the strategy of invigorating China through science and education.”

Within that second priority, the finance ministry said it would allocate 31.3 billion yuan for improving vocational education. Amid high youth unemployment, especially for university graduates, electric car company BYD and battery maker CATL are among those working with vocational schools to train staff for their expanding workforce.

Upgrading the industrial system and upgrading the quality of the Chinese workforce are the highest priorities. The implosion of the property sector will be softened and managed, but there will be no all out rescue; it will be allowed to deflate to reasonable levels. There is also a reorientation of the leadership cadres of the Party-state to support the technology upgrading orientation:

An increasing number of senior Chinese officials also come from an engineering background, particularly in aerospace.

One of those leaders with a rocket science background is Yuan Jiajun, who in October 2022 joined the Communist Party of China’s Politburo, the second-highest level of power. Yuan oversaw Chinese space missions in the early 2000s, including the first Chinese manned spaceflight mission called Shenzhou 5.

I repeat the graph from the beginning of the article below, showing the utter reorientation of Chinese bank new lending from the real estate sector to the industrial sector.

The West has reason to be very worried, not because of Chinese “excess capacity” but because of all the Western capacity that is being obsoleted by Chinese advances. The global light vehicle industry is just one of those sectors, another is the global chip industry as China increasingly exports mainstream chips at much lower prices than Western manufacturers.

Much has been made in the drop of in foreign direct investment (FDI) in China, driven by the increasingly restrictive Western technology restrictions. This is yet another Western own-goal as Western corporations are less exposed to the hot bed high technology environment within China and will inevitably fall further and further behind. China does have economic issues that it is dealing with, but that is not stopping its focus on economic and technological upgrading. It is passing the West while so many Western commentators deny its success, ignoring indicators of increasing strength and even claiming that China’s economic indicators are somehow “made up”. Or that much of the investments have been “wasted”, or at “what cost?”. Such a delusional state is not supportive of rational and robust Western decision making, rather it is a marker of increasing intellectual decline within the Western courtier class of policy makers, think tanks, media and other analysts.

In the early nineteenth century the disconnected Chinese elite were delusional with respect to their relative power compared to that of European nations and they paid the price in a century of humiliation. The delusional elites are now the Western ones, and they and their fellow citizens will pay the price for their delusions. The reconnection with reality will be very painful for their psychological health given their fundamental beliefs in Western supremacy.