Monthly update on Asia & China Market: 3 key questions on China’s property market
In this video, our Senior Emerging Asia Economist Aidan Yao answers the key questions on investors’ mind about the China property market:
- How significant is the property market in Chinese economy?
- Why is the China government so determined with the policy curb this time?
- Will the housing market shock destabilize the macro system?
Hello, welcome to our monthly video series. My name is Aidan Yao. I’m the senior emerging Asia economist at AXA Investment Managers.
A sudden collapse of the housing market has added to a long list of struggles facing the Chinese economy since 2021. There are many questions in investors’ minds about the significance of the property market in Chinese economy, why is Beijing so determined with the policy curb this time, and will the housing market shock destabilize the macro system.
We have just published a thematic report on China’s property market that tries to address some of these questions.
First, we do find that the real estate sector in China is indeed ‘too big to fail’. After accounting the upstream and downstream exposures, we estimate the whole sector can amount to about one quarter of the Chinese economy. On top of that, its connections with the banking system, government finances and household wealth can indeed make the entire system vulnerable to a disorderly market correction.
However, actions needed to be taken. The current development model of the property market has become increasingly incompatible with China’s long-term development strategies. The reckless expansion of the property bubble has widened wealth inequity, excess construction has polluted the environment, and so much investment in an unproductive asset in housing has undermined China’s productivity growth.
More fundamentally, sheltering demand, by our estimation, has already peaked due to demographic changes and slowing urbanisation, while investment demand is now being restrained by ‘housing is for living, not speculation’policies.
Hence, we do think ‘this time is different’ in Beijing’s policy tightening relative to past attempts to merely cool an overheating market.
Finally, reallocating resources from a systematically important part of the macro system clearly won’t be painless. With growth slowing and financial risks rising, Beijing has started to change its tactic to mitigate the housing market shock. A ‘two steps forward and one step back’ approach is now in motion to manage the short-term fallout of this longer-term transition change of an important part of the economy.
Thank you very much and stay safe.