A number of factors will cool the Chinese economy

The second half of the summer saw more modest price action with the stock and bond markets showing slight declines. Investors’ immediate focus will be drawn from a key meeting of global central bank governors in Jackson Hole and Canadian banks’ third-quarter results. Meanwhile, let’s turn our attention to deeper concerns about China’s economic health.

With the world’s second largest economy and population, China has a significant impact on global growth. Earlier this year, there was hope that China’s post-pandemic reopening would boost global growth, especially as other economies face a slowdown due to rising interest rates. But the truth turned out differently. The initial recovery in manufacturing, exports, industrial and consumer activity started to fade after the first quarter of the year and then became less encouraging.

There are many long-term issues facing China: demographics, geopolitical strains, policy uncertainty, and retreat from globalization. Nevertheless, the above factors cannot bear all the blame for China’s economic slowdown. Instead, I would point to cyclical factors such as weak consumer demand and an export market affected by a global demand shift from goods to services.

A primary concern is the deteriorating property sector. In 2020, the government clamped down on the sector in an attempt to reign in high foreign exchange, heavy construction and inflated house prices. Since then, the housing market has experienced significant headwinds. Revenue from home sales and pre-sales, the biggest source of funding for Chinese property developers, is falling.

That has translated into financing challenges for some of the sector’s biggest companies, such as Evergrande (which recently filed for bankruptcy protection) and Country Garden (which defaulted on some of its bonds earlier this month).

These pressures have created reluctance among Chinese homebuyers, with some worried that pre-paid housing will fail, while others expect prices to continue to fall. This background helps explain the more general reluctance of Chinese consumers. The property sector accounts for approximately two-thirds of their wealth and almost a quarter of their country’s annual economic output.

In other words, the primary asset for many households and one of China’s most important economic engines is stagnant. At the same time, signs of weakness beyond the housing market are weighing on consumer confidence more broadly.

Reviving China’s growth will depend on effective policy interventions and the evolution of trade dynamics. With more policy easing expected in the coming months, the Chinese government has taken both small and largely incremental measures. But any future intervention may pale in comparison to the bold action seen globally in recent years.

Despite the prevailing pessimism, it’s important to put things in context. Forecasts put China’s growth at just 5 percent this year — still higher than many developed countries. And it will be the best contributor to global growth in the next decade. As China charts a new path toward sustainable growth, relying less on infrastructure and housing, it will run into its fair share of opportunities and challenges. We seem to be witnessing such a period now!