China’s economy has undergone significant shifts over the past five years, marked by a dramatic contraction in its real estate sector and a simultaneous surge in export performance. Official figures show new home sales have declined by more than 50%, with private analyses indicating an even sharper drop from peak levels. This rapid downturn, unfolding over just four and a half years, ranks among the swiftest property market collapses in recent global history. The consequences include persistent deflation since 2022 and a decline in long-term bond yields below those of Japan for the first time. n nDespite the domestic slump, Chinese exports have expanded at an average annual rate of 7.7% over the same period—more than triple the 2.2% growth seen in the five years before 2021. This export strength has acted as a critical buffer, preventing deeper economic contraction. The rise reflects China’s strategic advancement into higher-value industries, supported by extensive investments in industrial infrastructure and research. The nation now leads in sectors such as automotive manufacturing, shipbuilding, and robotics. n nAdditionally, China has strengthened its position in the supply chain for critical materials, particularly rare earth elements, through advanced mining and processing capabilities. This control enhances its leverage in international trade discussions, especially with the United States. Progress in artificial intelligence further underscores China’s technological capabilities, with its latest AI models demonstrating performance second only to those developed in the U.S. n nHowever, sustaining this export momentum may prove difficult as global trade conditions shift and protectionist policies increase. With property investment falling at a 20% annual pace and manufacturing investment turning negative, Beijing faces mounting pressure to implement structural reforms. Current measures—such as a 10 trillion-yuan debt swap for local governments and interventions in equity markets—are seen as initial steps but insufficient to resolve deep-rooted challenges. n nOver the past 18 months, authorities have rolled out accessible policies like retail incentives, relaxed home purchase rules, reduced mortgage rates, and municipal debt relief. Yet, more complex issues remain unaddressed. The upcoming 15th Five-Year Plan is expected to confront these, including strategies for restructuring the property sector, maintaining global competitiveness, and stimulating household consumption. n nProjections suggest GDP growth will slow to approximately 4.3% in 2026. If export growth declines from 8% to a range of 3%–5%, it will fail to compensate for the ongoing real estate downturn. Moderate deflation is anticipated again next year, underscoring the need for more aggressive policy action. Without bolder stimulus, risks of subpar growth and social strain could intensify. n nOver the next five years, U.S.-China competition will remain a defining feature. While China’s industrial advancements support continued export growth, rising trade barriers—not only from the U.S. but also from Europe and emerging economies—pose challenges as its manufacturing output pressures domestic industries abroad. n
— News Original —nChina Economic OutlooknAccording to official data, new home sales have plummeted by over 50% in the past five years, with private sector estimates suggesting an even steeper drop from peak levels. This collapse, compressed into just four and a half years, represents one of the fastest property bubble bursts in modern economic history. The ripple effects are profound: China has experienced deflation since 2022, with 10-year government bond yields falling below Japan’s for the first time. n nHowever, the property crisis represents only part of the picture. While domestic demand crumbled, Chinese exports grew at an average annual rate of 7.7% over the past five years, a remarkable acceleration from the approximately 2.2% annual growth in the five years preceding 2021. Without support from such strong export performance, China would likely have experienced deep deflation and recession. n nThis export boom reflects China’s progress in climbing the value chain. Through massive investment in industrial parks, factories, and R&D, China has established dominance in sectors such as automobiles, shipbuilding, and robotics. Beyond high-end manufacturing, China has also become increasingly sophisticated in mining, separating, and processing critical materials, including rare earths, which has given the country bargaining power during trade negotiations with the US. n nChina has also made significant strides in the development of artificial intelligence. The success of China’s recent AI models serves as a reminder that China performs exceptionally well in this field, perhaps second only to the US. n nLasting recovery requires both domestic fixes and trade strategy n nChina is unlikely to sustain its exceptional export growth as global trade normalizes and protectionist pressures mount. With property investment continuing to decline at a 20% annual rate and manufacturing investment turning negative, Beijing will need to act decisively. n nThe government’s response thus far — including a 10 trillion-yuan local government debt swap program and stock market interventions — represents important first steps but falls short of addressing the underlying structural issues. Policymakers are running out of easy policy tools. Over the past 18 months, they implemented relatively straightforward measures such as retail sales stimulus, property market support via eased restrictions and lower mortgage rates, and local government debt relief. n nIn our view, the 15th Five-Year Plan will need to address the more difficult policy issues, such as how to manage the cleanup of the property sector, maintain competitiveness in an increasingly challenging global trade environment, and boost consumption. n nWe expect annual GDP growth to slow in 2026 to around 4.3%. Also, if China’s export growth slows from about 8% to between 3% and 5%, that will not offset the sharp decline in the property sector. It will be essential for the government to become much more serious about dealing with property-sector problems. We believe there will be moderate deflation again next year, as well. n nChina will have to be more proactive in the coming months — such as by introducing a new round of support measures — otherwise it may risk deeper deflation, below-target growth, and potentially greater social instability. n nThe US–China rivalry will also be a central theme for the next five years. While China’s improved performance across many sectors can sustain reasonable export growth, it will face increasing trade barriers — not only from the US but also from European countries and emerging markets — as China’s manufacturing strength pressures domestic industries in those economies.
