Donald Low

Opinion | To restore consumer confidence, China must save the property sector

Instead of squandering billions buying unsold properties, Beijing should learn from the US response to the global financial crisis

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Donald Low

Published: 9:30am, 27 Aug 2024

Since the middle of last year, it was evident that the Chinese economy faced two major risks. The first was that deflationary expectations would depress private spending and investment. In a deflationary environment, households are less likely to spend on items financed by borrowing, while firms cut back on hiring and investing in anticipation of wages and other costs falling.

This keeps credit demand weak and renders lower interest rates less effective in boosting domestic demand. The second major risk was that property prices would continue to decline, undermining consumer confidence and spending.

The economic data for July shows that both risks have materialised and indicate that the economy’s growth momentum might be faltering. Three indicators were especially worrying.

The first was that annual gross domestic product (GDP) growth in July slowed to 4 per cent. This came after it had already slowed to 4.7 per cent in the second quarter of the year.

Second, private investment in the first seven months of the year registered zero growth – indicating a lack of investor confidence. While industrial output increased by 5.1 per cent in July compared to a year ago and fixed-asset investment was up 3.6 per cent, these increases were lower than expected and also lower than in the first half of the year.

Third, while consumer prices edged up slightly, producer prices remained firmly in deflationary territory and have been since October 2022.