China's Economic Slowdown - The Property Crisis as a Drag on Growth

Published on 18 Dec, 2023

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The slowdown in China can be linked to several factors, including the zero-COVID policy which aimed at curtailing the spread of the virus with China being one of last countries to withdraw the policy; poor consumer spending which was expected to inverse post the lift-off of the Zero-COVID policy and rising youth unemployment which narrowed consumer spending even further. The property sector, which accounts for about a quarter of China’s GDP and a major component of household wealth, slumped in the recent years due to its highly leveraged functioning pattern. This caused big players in the construction industry to default on debt obligations with majority of it being offshore bonds. The property sector crisis spilled over other sectors of the economy, such as the financial sector which faced the risk of contagion and systemic instability; the industrial sector that faced the risk of overcapacity and deflation; and the consumer sector faced the consequences of lower consumer confidence and spending. The slowdown had significant implications on the global economy, trade, investment, and innovation, as well as for China’s domestic stability and development goals. The IMF recently lowered its growth projections for China, putting it at 4.2% in 2024 and about 5% this year. Moreover, rating agencies downgraded outlook on China's government credit ratings to negative from stable. To support an economic recovery in 2024, the Chinese government pledged to spur domestic demand, resolve the country’s spiraling real estate crisis, expand high-level foreign investments, diffuse risk related to local government debts, and prioritize the development of strategic sectors. The government also emphasized on strengthening macro policies, while continuing with its proactive fiscal policies and prudent monetary action.