China's economy faces long road to full recoveryーNHK WORLD-JAPAN NEWS

Key Concepts

• Purchasing Managers Index (PMI)
• Economic Contraction
• Property Market Downturn
• Unsold Housing Stock
• Local Government Finances
• Financial Institutions
• Bad Debt Ratio
• Per Capita GDP
• Unmet Demand

Economic Performance and Manufacturing Sector

The Chinese economy has been experiencing a slowdown for a couple of years without a significant rebound. Latest data indicates widespread struggles for companies. The Purchasing Managers Index (PMI), a measure of manager sentiment, reveals a bleak outlook in the manufacturing sector. A PMI reading below 50 signifies economic contraction. In November, the manufacturing PMI stood at 49.2, marking the eighth consecutive month below the 50-point threshold. This slowdown is characterized by slow new orders, even with some US tariff reductions on Chinese imports. A survey of 3,200 manufacturers showed that large, midsize, and small companies all reported PMIs below 50.

Service Sector Performance

The service sector, while performing slightly better than manufacturing, is also not showing robust growth. Its PMI was recorded at 49.5. Notably, this was the first time the non-manufacturing PMI fell below 50 since December 2022, a period affected by the pandemic.

Root Cause: Weak Property Market

According to prominent China economist Tamay Yoshino, the weakness observed across various economic sectors stems from a persistently weak property market. This market has been soft since 2020 and has not yet reached its bottom.

• Floor Space Sold: In October, the amount of floor space sold was half of what it was in the same period in 2021.
• Unsold Housing Stock: In September, the ratio of unsold housing to sold housing was five times higher.
• Market Recovery Timeline: It is estimated that it will take at least two years for the property market to recover to its pre-bubble burst levels of 2019.

Government Intervention and Challenges

The Chinese government has implemented various measures to stimulate the property sector. These include:

• Local Government Purchases: Local governments are buying unsold apartments and converting them into housing for low-income families.
• Financial Support for Developers: Local governments are providing financial assistance to property developers to ensure they can complete projects and deliver apartments to buyers who have already paid.

However, Tamay Yoshino points out that these initiatives are progressing slowly due to the reliance on local governments.

• Local Government Finances: Local governments generate significant revenue (approximately 30% of their finances) from selling land usage rights to housing developers and from taxes within the sector.
• Strain on Coffers: A struggling property market directly impacts these revenue streams, limiting the capacity of local authorities to actively implement measures like purchasing unsold housing.

Comparison with Japan's Bubble Burst

Tamay Yoshino draws parallels between China's current situation and Japan's property bubble burst in the early 1990s, but also highlights crucial differences.

• Japan's Experience: The collapse of Japan's property bubble led to the failure of financial institutions, resulting in a prolonged economic slowdown.
• China's Current Situation: In China, the property market downturn has not yet triggered a systemic crisis in the financial system. The ratio of bad debt held by banks remains low, at approximately 1%.
• Household Situation: A key difference lies in the household economic standing. China's per capita GDP is currently around $13,000. In contrast, when Japan's bubble burst, its per capita income was significantly higher, around $30,000 to $40,000, roughly three times that of China today. This suggests China still has room for growth.

Potential for Growth and Government Role

Despite the current challenges, Tamay Yoshino believes there is substantial unmet demand within China's economy, particularly in rural areas where living standards can be improved. The key to revitalizing the economy lies in the government's ability to implement policies that effectively channel this demand.

Conclusion

The Chinese economy is facing a prolonged slowdown, primarily driven by a weak property market that has not yet bottomed out. While government measures are in place, their effectiveness is constrained by the financial reliance of local governments on the property sector. Although there are historical parallels with Japan's economic crisis, China's lower per capita income and the current stability of its financial institutions suggest a different trajectory. The potential for future growth exists, contingent on the government's capacity to stimulate unmet demand through strategic policy interventions.