China has turned a corner, finally. Five years after Beijing began cracking down on its
bloated property sector, its economy is now on a much more sustainable path anchored in high-quality growth – and the correction has left far fewer scars than many feared.
China’s property sector has been in a bear market since 2021, with average prices falling by 40% to 50%. This was partly by design. Beijing in 2020 sought to deflate a ballooning property bubble with its “three red lines” policy that clamped down on leverage in the sector.
While weakness in Chinese construction and ancillary businesses may continue to drag on economic growth for the next year, it appears that the property correction is bottoming out.
Shanghai’s property prices in the secondary market have begun to rise, and the pace of decline in home prices has again eased in March, with the worst contraction in prices recorded in late 2024.
Given the scale of the property market deflation, it’s remarkable that very few things broke in China. This was in contrast to the doomsday predictions that the correction would
be in line with – or much worse than – what happened in Japan after its property market peaked in 1989.
In the case of Japan, property prices fell 80% from their peak. The banking sector experienced a crisis in 1997. The economy fell into a deflationary trap that took 25 years to arrest – and only after aggressive money printing by the Bank of Japan and massive fiscal stimulus from the Ministry of Finance.
As a result, Japan’s per capita dollar GDP has been flat since the 1990s, according to data from the IMF World Economic Outlook. On this measure, Japan fell from number three in the world in 1995 to number 32 now, behind the Czech Republic.
China went into its property crisis even more vulnerable than Japan – or so went the popular belief in 2021-22 – because it was not yet rich when its implosion occurred. Many feared a shock could trigger other breakages in the economy and the financial system.
That’s not what happened. China managed to eke out 5% real GDP growth annually even
with a property sector in contraction. Even more importantly, Beijing used this challenging period as an opportunity to shift its policy aim from maximising economic growth to improving the quality of its growth.
In the decade before the COVID-19 pandemic, China’s real GDP growth averaged around 7%, with nominal GDP growth averaging 10% to 11%. Since then, growth has decelerated by 2 to 3 percentage points.
That decline may appear worrying, but it’s actually a positive signal of a shift to a more sustainable growth model.
