A Need to Act

China’s current problems have been long in the making and a consequence of its historic growth model. Since the original opening up of its economy, China has pursued an export driven growth model. This model is where a country focuses on increasing its exports to drive economic growth and development. This approach typically involves policies such as maintaining a cheap currency, export subsidies, and the development of export-oriented industries to boost competitiveness in global markets and attract foreign investment. This model had been adopted successfully from the 1970s by many East Asian economies and is quite effective at improving living standards and national wealth, to a point. Beyond this point, an economy needs to transition towards consumers and services to match the living standards of the most developed countries.

Alongside this, the property market in China has been a key national focus. The rising living standards of China’s population and the move from rural areas to urban centres necessitated a globally unprecedented amount of homebuilding. In addition to this, previously China’s Central Government has responded to economic slowdowns by stimulating the housing market directly, encouraging homebuilding from developers and homebuying from households. Local governments were also involved with supporting the ongoing growth in the housing market as they sourced much of their revenues from land sales to developers. Seemingly insatiable demand for multiple properties drove price to income ratios well beyond reasonable levels. 

Decades of investment in manufacturing capacity to support the export led growth model and as well as overinvestment in housing had left China’s economy with too much of both. Recognising this as a structural problem, particularly with respect to the housing market, China’s Central Government had been actively trying to slow the housing market on and off for more than a decade. However, in 2020, China’s Government implemented the Three Red Lines policy, which was aimed at improving the financial health and sustainability of the property development sector. Evidently, this was the straw the broke the camel’s back and the property market has been deteriorating ever since. A number of property developers went bankrupt (not being able to meet the new Three Red Line Conditions). House prices have been falling since 2021 and housing construction has been falling in earnest since 2022. With property so important to economic activity and household confidence, the slowdown threatened to drag the rest of the economy down with it.