In the last week of October, China experienced a decline in factory activity, with the manufacturing sector slipping into contraction. Meanwhile, growth in the services sector eased, highlighting the economy’s fragile state.
Real Estate SectorThe most significant structural challenges within the Chinese economy revolve around the real estate bubble and its associated debt issues. Over the past decade, there was an excessive incentive to initiate new construction projects through loans rather than prioritizing the sale or completion of existing projects. Meanwhile, in a country with a population of 1.4 billion, the demand for housing remained high. Consequently, this artificial scarcity led to soaring prices for the apartments that did reach the market. The real estate sector grew to account for 20 percent of the economy while providing employment for just 2 percent of the workforce.
Paradoxically, China has millions of unoccupied apartments. The reason prices remain artificially high and the glut remains unresolved is due to local government-imposed price controls. Chinese property developers are required to register their prices with local housing authorities before selling homes. Local governments heavily depend on land sales for 80 percent of their revenue, incentivizing them to maintain high prices. Additionally, the real estate sector serves as collateral for hundreds of billions in bank loans, so allowing prices to decrease would lead to a surge in loan defaults.
UnemploymentManufacturers selling to export markets continue to face a declining trend, as indicated by the new export order index. In addition to this, approximately 300 million migrant workers in China, who moved from rural areas to urban centers for factory employment, are currently struggling to secure jobs. These workers are not accounted for in China’s official unemployment figures because they are registered in their hometowns or villages. The official jobless rate of 5 percent only covers urban workers, thus excluding the broader employment issues faced by migrant workers.
‘Downgraded Spending’The Golden Week holiday at the start of October typically provides a boost to both travel and consumer spending. However, this year, the increased number of travelers can be attributed, in part, to wealthier Chinese individuals choosing to stay within the country due to reduced overseas holiday spending.
While the total spending during this period was only slightly higher than in 2019, this does not indicate a true recovery. Instead, it signifies the loss of three years’ worth of growth. This also implies that China had to rely on a greater volume of travelers this year to generate revenue equivalent to that of 2019, further underscoring financial constraints among the population.
Understandably, Chinese consumers are seeking cost-cutting measures, with discount retailers gaining ground while luxury brands are losing favor. In the first five months of the year, China experienced a 9.3 percent surge in retail spending as COVID-19 restrictions were lifted, but this apparent recovery has now stalled.
The term “downgraded spending” is trending on the Chinese social media platform Weibo. Traditional retailers like Alibaba and JD.com have witnessed declining sales, while discount shopping sites like Pinduoduo are on the rise. Consumers are also opting for cheaper domestic cosmetics and clothing brands over foreign ones. Meituan, a Chinese platform offering food and product delivery services, reported a drop in orders due to consumers avoiding additional delivery fees.
When citizens harbor uncertainty about the future, they tend to save money, leading to increased bank deposits. The central bank has reduced interest rates in an attempt to encourage spending, but so far, there are few takers. This presents a challenge for Chinese officials hoping to boost the economy by stimulating domestic consumption.