News in Charts: Time to rethink China’s growth model

Looking back on how 2023 has panned out for the Chinese economy, we can definitely say that developments in the Asian giant have not been boring. The year started with great optimism, stemming from the reopening of the economy after three years of draconian zero-COVID policy; but this positive sentiment quickly vanished, as low pandemic savings and the impact of the weak housing market on consumer confidence ended up taking their toll on the real economy. However fleeting, the reopening effect does mean that China is likely to hit its GDP target of 5% this year. But the worse-than-expected performance of the economy has piled up further evidence that the country needs a new model of growth, now that the housing market has stopped being the answer to all its prayers.

Spurpose tool to make up the shortfalls in , boost short-term growth through housing investment, and maintain a partly artificial level of employment to avoid social unrest. None of these is a consequence of market forces, and therefore imbalances have grown over the years. An imbalance is a slower-moving variable, which shows that vulnerabilities are building up in the economy. These tend to evolve over time and are therefore a good gauge of how the underlying ‘riskiness’ of an economy is developing. A reflection of the imbalances in China’s housing sector is the unaffordability of properties, ranging between 5 and 20 multiples of household disposable income.

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Increasing the supply of houses available for sale would lower prices and bring price-to-income ratios back in line with norms in other countries. But while elevated house prices are considered an issue for first-time buyers, they are also a boon for developers, mortgage-holders, banks and local authorities. This has led to very long delays in residential construction completion, intentionally brought about in the hope of avoiding the As the chart below shows, the amount of housing mothballed into the ‘under construction’ phase of a project or ‘paused’ altogether has grown sharply over the past few decades. The quantity is now enough to house the entire population of Brazil in comfort.

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While the stock of spare housing in China continues to grow (aka the imbalance), the pace at which it is expanding (the flow) has slowed, like partially turning off the tap in the bath. We often measure this flow concept as the number of new housing starts and transactions. The overall number of new projects started has fallen on average by more than 60% since its peak in December 2020, and is now at its lowest since the depths of the GFC in 2007–9.

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The deterioration in China’s housing market is also evident in prices. As we can see in the chart below, the picture is heterogeneous across regions, with some having managed to keep prices relatively stable while others are already experiencing material price deflation. The northern provinces are where the vulnerabilities are most concentrated, although the risk of a housing market collapse is arguably nationwide.

Despite the risk, a nationwide housing market collapse spilling over to the banking sector is not Fathom’s central scenario. Instead, we expect a ‘ that is likely to last for years as China absorbs the excesses accumulated. As a consequence, China urgently needs to find alternative sources of growth. But its options limited, particularly in light of de-risking by the US, China is likely to face a period of ‘Japanification’, characterised by low economic growth over the coming decades.

There are, however, several possible routes out for China. Automation is one, another is our broken wing hypothesis.

The views expressed in this article are the views of the author, not necessarily those of LSEG.

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