The Chinese Economy
The Chinese economy has experienced rapid economic growth over the past 30 years thanks to reforms that took place during the 1980’s which saw the country transition away from strict state control and ownership towards greater liberalisation and privatization of industry. A decision was also made by the government during that time to gradually move away from its emphasis on the agricultural sector and instead divert attention towards heavy industry, and later towards private commerce, construction, real estate, and the service sector.
The country is presently the second largest economy in the world, next to the United States, with a recorded GDP of $15 trillion in 2021. Annual GDP in China has averaged at 9% between 1979 and 2019, and with its transition from a centrally planned economy to a more market orientated one, the country has moved towards greater emphasis on private commercial activity and has a highly diversified industrial structure. China is a major exporter of manufactured goods, including electronics, machinery and textiles and a major consumer of raw materials such as oil, iron ore and soybeans.
More recently, the country’s services sector has been steadily developing, largely driven by areas such as finance, technology, and e-commerce. The service sector has doubled its share of economic output over the last two decades, accounting for 53.3% of its GDP in 2021. China’s service sector includes transportation, storage and shipping, wholesale and retail, hotel and catering services, financial services, and real estate.
A Breakdown of Chinese GDP
Industrial Sector
The Chinese Economy is primarily driven by its industrial sector. The Chinese industrial sector accounts for 33.3% of the country’s GDP as of 2022. China is the world leader in manufacturing, producing almost half of all the world’s steel. Its mining industry extracts coal, iron ore, salt, oil, gas and gold.
China is also a leader in machinery manufacturing, armaments, textiles, and apparel, as well as a major manufacturer of consumer products, processed foods and telecommunications equipment.
It is a growing supplier of automobiles, trains and related equipment, ships, aircraft, and space vehicles, including satellites.
Wholesale and Retail Sector
China’s wholesale and retails sector is the second largest driver of the Chinese economy as of 2022, accounting for 9.5% of total GDP.
The sector includes a wide range of businesses, from traditional markets and street vendors to large shopping malls and online retailers.
The rise in income levels and increased urbanisation in China has led to increased consumer spending, and a rapidly growing middle class. Higher per capita income has also led greater demand for consumer goods, spurring on the growth of the wholesale and retail sector. This has led to a growth in retail good such as electronics, apparel, and food and beverage products. China also has a growing e-commerce sector, which as of 2021 ranked number one in the world for retail e-commerce sales.
Financial Intermediation
The financial intermediation sector in China is the third largest contributor to national GDP. It accounts for 8% of total GDP.
Financial intermediaries in China include banks, insurance companies, securities firms and other financial institutions. China’s banking sector is the largest and most important financial intermediary in the country. The “Big Four” state owned banks, namely Commercial Bank of China, China Construction Bank, Agricultural Bank of China, and Bank of China, account for the majority of banking assets and deposits in the country. Several smaller commercial banks, rural credit cooperatives, and foreign banks also operate in the country.
China’s banking sector has undergone a major transformation over the past few decades, moving from a state run system to one that is private ownership based.
Total assets in the Chinese banking system were worth 288.6 trillion yuan by the end of 2021. In April 2021, China’s Central Bank reported that it had collected insurance premiums from a total of 4,024 institutions, with a balance of 42.38 billion yuan.
Agriculture, Forestry, Animal Husbandry, and Fishery
China is the world’s largest agricultural producer. However the country has reduced it’s focus on agriculture over the past few decades. The agricultural sector currently accounts for 7.7% of total GDP in China.
China’s agricultural sector is diverse, producing a wide range of crops and livestock across the country. The major crops that it produces include rice, wheat, corn, soybean and cotton, while its livestock breeds include pigs, chicken and cows. The country is also a major producer of fruits and vegetables including applies, citrus fruits, tomatoes, and potatoes.
In recent years, government initiatives have involved introducing greater mechanization and automation in farming operations to improve efficiency. There has also been a move to consolidate small farms into larger operations and invest in the development of agricultural infrastructure.
Construction
China’s construction sector constituted 6.9% of overall GDP in China in 2022. The output value of construction in China grew progressively between 2011 and 2021, reaching 29.31 trillion in 2021.
China has the largest construction market in the world, and it receives significant investments in infrastructure, commercial and residential construction. The Chinese government has invested heavily in infrastructure projects, including the construction of high-speed railways, airports, highways, and ports. China has built the largest high-speed rail network, which covers over 22,000 miles, and connects cities and regions across the country.
Real Estate
China’s real estate sector was responsible for 6% of total GDP in 2022 and was worth 7.8 trillion in 2021. The Chinese real estate sector has experienced rapid growth in recent years, particularly in cities like Beijing, Shanghai, and Shenzhen. Growth in the real estate sector has been driven by urbanisation, rising income levels and a growing middle class, which have led to increased demand for housing and real estate property.
Transportation, storage and post
The transportation, storage and post sector in China was responsible for 4.10% of the county’s GDP in 2022. China has the largest logistics sector in the world. This is largely attributed to the country’s growing logistics infrastructure, which includes an extensive network of warehouses and storage facilities paired with advanced IT services.
The Chinese government has invested significantly in the logistics sector, amounting to 181.6 billion Yuan in 2021. During the same period, the market value of China’s logistics sector doubled, reaching 335 trillion yuan in 2021.
China’s e-commerce logistics industry has also expanded significantly, with revenues exceeding 850 billion Yuan in 2021.
Information Transmission, software and IT services
The information transmissions, software, and IT sector contributed 4% to China’s GDP in 2022. The number of internet users in China has grown to 989 million in 2020 and total revenue generated by businesses in software and IT services reached 8.2 trillion yuan by the end of 2020.
Leasing and Business Services
The leasing and business services sector was responsible for 3.20% of China’s GDP in 2022.
The Relationship between Construction, Real Estate and Economic Growth
The construction industry in China has contributed significantly towards the country’s economic growth over the past several decades.
Construction can influence economic growth in several ways. The first of these is through job creation. The construction industry employs individuals throughout the economy, providing jobs for people with varying levels of skills and education, from unskilled laborers to architects and engineers. The creation of jobs in the economy leads to increased consumer spending which drives economic growth.
The construction industry can also contribute to economic growth through investment in infrastructure development. The construction of roads, bridges, airports, and other infrastructure projects, all require a significant amount of investment. These investments lead to economic growth by creating opportunities for businesses to expand their operations and by making it easier for people to access goods and services.
The construction industry also generates demand for a wide range of goods and services. This includes construction materials, equipment, and services such as architecture and engineering. The demand for these goods and services stimulates economic activity, which leads to increased production and economic growth.
Another way that the construction industry impacts economic growth is through its influence the real estate market. The construction of new homes and commercial buildings creates opportunities for real estate developers, builders and other businesses involved in the construction industry, leading to increased property values and subsequent economic growth.
A similar correlation exists between the real estate sector and a country’s GDP. As income needs to be accumulated before a person buys their home, a healthy real estate sector often indicates that national income is at a good level. There is a very close relationship between residential property prices and GDP per capita, with the two often trending together during periods of economic growth. This is notwithstanding the fact that the real estate sector is also linked to various other industries such as construction, housing rental, the buying and selling of property and financing.
Developments in the Construction Sector
The construction sector in China has experienced rapid growth over the past thirty years, as the government moved away from a heavily state controlled dynamic towards increased liberalisation with its “Two Rail System”. The system allows for an equal balance between free-market forces and the controlled hand of government intervention. The system is touted as being dependent on five factors, namely state efficiency, enterprise activity, market regularisation, surveillance severity, and assurances performances.
The country’s construction sector has generally been led by three large national companies, China Railway Group Ltd, China Railway Construction Corporation Ltd, and China State Construction Engineering Corporation. These companies created multiple subsidiaries over the course of their corporate evolution, and varied the services they offered over time as well. Today they engage in a wide array of services which include housing development, public utility, and infrastructure construction, and are involved in construction projects under contracts and those that are investment based, as well as being involved in both inner and outer market segments.
The Rise of the Chinese Real Estate Sector
As mentioned above, the Chinese real estate sector has grown tremendously over the past 30 years. In the early 1990’s, the Chinese government began to allow the private ownership of housing, and it was during this time that the real estate sector began to develop. Affordable housing policies were introduced to encourage the construction of the housing sector, followed by a series of additional policies aimed at supporting construction and real estate, which led a boom and stimulated high levels of economic growth.
Growth in the real estate sector has been driven by increased investments as result of the easing of policies pertaining to property development. This, combined with several other factors, including the growth of the Chinese stock exchange and bond markets, the growth if its foreign currency reserve, and loose monetary policies have all contributed to the rapid expansion of the real estate sector. Real estate investment reached 8,601.3 billion Yuan in 2013, which amounted to 852 times its size in 1986, with an average annual growth rate 28.4%.
The contribution of real-estate investment to economic growth is measured based on the contribution of GFCF to GDP, where GFCF is the total value of acquisitions minus the disposals of fixed assets by resident units within a fixed period. The proportion of GFCF produced by real estate investment to GDP rose significantly between 2004 and 2013, from 6.4% to 8.0%. The overall contribution of investment to GDP growth between the same period averaged at 7.8%.
Taken as a whole, the contribution of the real estate industry to economic growth is measured in terms of the value added to GDP. This is the value added created by the housing services provided to the whole of society, and is inclusive of rent and living. It also includes the commercial services provided by real estate development and operation enterprises, as well as those provided by property management and real estate intermediaries during the construction, utilisation and transaction of buildings. The valued added of the real estate sector to GDP rose from 10.8% in 1997 to 12.7% in 2013.
The biggest property developers that have emerged in China over the past few decades include Country Garden, Evergrande Group, and Poly Real Estate Group. Very briefly, Country Garden operates in the property management and development sectors, with subsidiaries in construction and hospitality. It has developed residential, commercial, industrial and hotel projects in China and abroad.
Evergrande Group has completed nearly 900 commercial, residential and infrastructure projects throughout China since 1997. It is popularly known for its involvement in the construction of the Flower City Stadium in Guaungzhou, estimated to be the largest football stadium in the world. Poly real estate is a state-owned company that primarily develops high-rise apartments, villas and multi-use complexes.
Country Gardens is presently valued at 273.7 billion USD, Evergrande has a market cap of 2.7 billion USD, and Poly Real Estate has a stock price of 14.92 CNY as of February 24th, 2023.
China’s Real Estate Challenge
The rapid rise of the real estate sector over the past few decades led to increasing pressure on the prices of the housing, causing the government to put in place initiatives aimed at stabilizing the market through increasing supply at the lower end and decreasing demand at the higher end. Policies aimed at supporting low-income housing and related initiatives targeted at banking loans have been implemented to cool rising real estate prices.
The Chinese government has also implemented restrictions on the ownership of multiple properties to handle the massive demand for housing. This includes restrictions placed on banks to such as increasing the required reserve deposit ratio and increasing equity down payment shares for houses above a certain size. The policies have been aimed at curbing excessive lending practices among the banks.
One of the foremost concerns surrounding the rapid rise of the real estate sector is that increased activity in real estate leads to corresponding increased activity in adjacent sectors, such as construction, materials, manufacturing, and property management. As the real estate sector expands, the weight of its impact on these other sectors increases as well.
This extends towards the financial and banking industries, which must keep lending to meet the increasing demand for housing financing. A sudden halt in the growth of the real estate sector would negatively impact the banking sector, as it would also have impact on other industries that have become dependent on it to fuel demand for their services.
The Chinese real estate sector faces several challenges in part due to some of the government’s practices and policies that have come into place in the country over the past few decades.
One such example is the government’s direction with regards to low-cost housing. While low-cost housing development is beneficial in theory, particular to the lower income earning members of society, property developers may not be as keen to engage in such projects. This is because low-cost housing development affords substantially lower returns to developers than they would receive from high-value projects.
A further issue stems from the practice of certain provinces to lend out land in order to meet budgetary requirements of the state. Low tax revenue earnings instigate these provinces to lease their land to private construction developers, triggering an increase in the demand for land and causing the price of land to rise. These rising real estate prices create competition among developers which leads to an ongoing cyclical price rise, in which the high price of land causes higher real estate prices which lead to increases in land value.
Perhaps the most significant issue with the real estate situation is China is that the strong interventionist approach by the government appears to have had a reverse impact on the prices in the real estate sector. As real estate values rise, the corresponding decrease in demand from buyers unable to afford the higher value of properties should lower the prices according to natural market forces. However, in China, the prices to do not seem to fall.
There is speculation that this is due to investors who rush into the market when prices are high, artificially propping them up. However, the heavy interventionist approach by the government may also be factor, as the market is unable to naturally adjust due to the many interventionist policies put in place to regulate the market. This, in combination with the general rush in construction and real estate development over the past 20 years have resulted in what is being referred to as the Chinese real-estate bubble.
The current trend with regards to the real estate sector in China is that there is a high level of debt among some of the major property developers in the country. These developers rushed to finance projects during the real-estate boom period to meet the high demand instigated by government in efforts to promote and sustain economic growth. Annual sales of dollar denominated offshore bonds, which are bonds sold mainly to foreign investors, surged from $675 million in 2009 to $64.7 billion in 2020. This resulted in large amount of outstanding bonds left over as unpaid debt.
The government initiated its “Three Red Lines” policy in 2020 to reduce borrowing by setting limits on developers’ liabilities, debt, and cash holdings. This led to several major developers defaulting on their loans, including China Evergrande Group and Kasia Group Holdings ltd.
The net effect is that the real estate sector in a major quandary. Sales among the top hundred developers halved in the first four months of 2022 and construction fell by 14% from the previous year. A mortgage boycott took place by potential homeowners who did not receive their properties, prompting the government to put in place stricter measure on the pre-sale of homes, which is a practice in which buyers pay for housing projects that are still in development. The government had also announced that it would offer a 200 billion Yuan loan to support stalled housing projects.
Conclusion
The rapid development of China’s construction and real estate sectors have indeed been a major contributor to the country’s economic growth. It’s policy direction, rooted in initiatives that began in the 1980’s to transition from a heavily centralised, state-controlled economy, towards increased privatisation, have been a central factor that has spurred economic growth in the region and its various sectors over the last 30 years.
While the construction and real-estate sectors have developed rapidly, a combination of factors which include the unchecked price rise in real estate values, the over-financing of development projects, as well as government interventionist practices preventing market forces from adjusting naturally have caused the real estate sector to expand in an unsustainable manner.
As China reopens in 2023, the IMF has released a projection which suggest that its economy is predicted grow by 5.2% this year and it is expected to contribute to one third of global economic growth. Moving ahead, the country will need to put in place comprehensive macroeconomic policies and structural reforms to secure its recovery and prevent significant economic slowdowns in the coming year.
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