(Yicai) Oct. 28 — China’s National Bureau of Statistics (NBS) recently released its third quarter national accounts, confirming the broader macroeconomic impact of the real estate downturn.
Academic studies using input-output tables estimate that residential and commercial real estate accounts for 24 percent of China’s GDP when all connections are taken into account. If floor space under construction is an indicator of real estate activity, the downturn in the real estate market could subtract nearly 3 percentage points from GDP growth this year.
In other words, the NBS reported that GDP increased by 4.8% in the first three quarters. But without the real estate contraction, growth would have been closer to 7.8%. It would be a mistake to think that 7.8% is the economy’s potential growth rate. Economic activity has benefited from supportive policy measures. Nevertheless, this exercise shows an economy where there are sectors of great strength beneath the weak headline numbers.
There are some preliminary signs that the downturn in the real estate market may be bottoming out. Although residential floor space sales volume in September was still down 19% year-on-year, this was a marked improvement from the 28% decline in January-February and continued the positive trend of the previous month (Figure 1). There are also signs of stabilization in the number of cars taking part.
Figure 1
These data reflect NBS estimates of value added in the real estate sector, which contracted by 1.9% in the third quarter. This is a significant improvement from the 5% decline in Q1 and Q2 (Figure 2). Note that according to the production side of the National Accounts of the NBS, the real estate sector accounts for 6% of GDP. This is the direct contribution of the real estate sector to GDP. Upstream and downstream connections, which account for 24% of the above, are ignored.
Figure 2
The recovery in the real estate market will be supported by a series of recently announced policy measures. Housing and Urban-Rural Development Minister Nee Hong said the government would boost urban regeneration by renovating an additional 1 million homes. In addition, local governments would be allowed to issue special purpose bonds to convert unsold apartments into affordable housing. Late last month, People’s Bank Governor Ban Gongsheng cut mortgage rates by 50 basis points and lowered the minimum down payment for second homes from 25% to 15%.
The year-to-date GDP growth rate of 4.8% reported by NBS is only slightly lower than the 5.2% recorded for all of 2023. However, the data shows a slower quarterly trend due to a decline in the contribution from consumption, partially offset by increased support from net exports (Figure 3).
Figure 3
Year-to-date, household spending has grown by just 5.6%, slowing from 9.2% a year earlier. This trend is clearly negative, with spending increasing only 3.5 percent year-over-year in the third quarter (Figure 4).
Figure 4
Part of the slowdown in spending in the third quarter can be attributed to the household savings rate rising to 31% from 30% last year (Figure 5). But overall this year, savings rates have actually declined slightly. This means that spending is slowing down due to slowing income growth. In fact, revenue rose 5.2 percent in the first three quarters of this year, compared to 6.3 percent a year earlier.
Figure 5
Looking at the composition of household expenditures, the impact of the recession caused by the real estate recession becomes clear. Spending on housing and household equipment, goods and services has been the slowest category so far this year. Nevertheless, households are very keen on purchasing other items (Figure 6).
Figure 6
Early signs in the fourth quarter point to continued consumer confidence. For example, we took our daughters to picturesque Ningbo for the National Day Golden Week holiday. Hotels, restaurants, and scenic spots such as the historic Tianyi Pavilion were crowded with vacationers. Apparently Ningbo is not the only popular tourist destination. China’s Ministry of Transport reported that the number of holiday travelers in October this year was 279 million, up 5% from last year and 25% above pre-pandemic levels.
The definition of consumption in the national accounts, shown in Figure 2, includes expenditure by governments as well as households. The downturn in the real estate market is also having an impact here, in the form of reduced land sales income for local governments. As a result, local governments are being forced to curb spending. Year-to-date, local government spending has been essentially flat, slowing from 3% growth last year and 7% growth in 2022 (Figure 7).
Figure 7
Real estate investment declined for the third consecutive year due to weak housing demand (Figure 8). With the exception of the real estate sector, investment growth has been faster than before the crisis, with investment in manufacturing showing particularly strong growth. The rotation of investments from real estate to manufacturing bodes well for future productivity levels.
Figure 8
Private sector investment has nearly stopped over the past two years. However, I do not think that investor confidence has collapsed. A relatively large proportion of private sector investment is in real estate. Despite slowing GDP growth, the private sector is investing much more intensively in manufacturing than before the pandemic (Figure 9). This suggests that the downturn in private sector investment is a sectoral issue and that entrepreneurs’ confidence in non-real estate businesses remains fairly high.
Figure 9
There have been some positive signs for international trade this year. Exports increased by 4% in dollar terms after falling by 6% last year, a change of 10 percentage points. Almost two-fifths of this variation is explained by the four main products highlighted in Table 1. With these products accounting for only one-fifth of 2023 export levels, it is clear that exporters in these sectors are punching well above their weight. .
Table 1:
Main export products in 2024
Turning to exports by destination, Table 2 shows that last year’s decline has reversed to a modest increase this year in all major regions. The contribution of exports to the US is notable. By 2023, 15% of China’s exports will go to the United States. But the 17 percent change in growth rate (from minus 16 percent last year to 1 percent this year) means that sales to the United States accounted for 30 percent of the improvement in China’s overall export growth.
Table 2:
Major export destinations in 2024
When economic growth slows, China watchers tend to become discouraged. However, a closer look at the data reveals that many of the weaknesses, while significant, stem from a single sector. Supportive policies will help stabilize the real estate market and ensure that GDP growth increases.
