China's Real Estate Crisis, What Sets This Apart?

China's Real Estate Crash Threatens Global Economy

Analyzing the Current Economic Woes and the Distinctive Factors of China's Property Market Crisis

In the wake of COVID-19, China's economy continues to grapple with challenges, raising concerns both domestically and internationally. Unlike past recoveries, the nation seems to be struggling to regain its economic momentum. Particularly alarming is the soaring youth unemployment rate, a concern that the Communist Party leadership, including President Xi Jinping, has yet to adequately address. Amidst these concerns, it's the stagnation of the real estate market that appears to be the root cause of the crisis, prompting worries both within and outside China.

Nobel laureate economist and professor at the City University of New York, Paul Krugman, sheds light on the gravity of China's crisis and its potential global implications in his recent New York Times column. While his analysis primarily concerns the United States, a nation like South Korea, heavily reliant on Chinese trade, must also pay keen attention to these signs of economic distress. To understand the potential impact on the Korean economy, let's first examine the current crisis China is grappling with.

In a recent Wall Street Journal article titled "The End of China's 40-Year Boom: What Comes Next?" the tone is unequivocal. One of the pillars that has propped up China's massive economy is its construction and real estate sectors. However, given the impossibility of sustaining rapid growth as in the past, the diagnosis is that China's failure to timely adjust its economic policies could lead to a prolonged downturn. Adam Tooze, a professor at Columbia University, notes, "We are witnessing a country that has followed the most dramatic trajectory in economic history grappling with changing gear." While China might find a breakthrough in sectors like electric vehicles, renewable energy, AI, and semiconductors, these advanced industries are susceptible to geopolitical tensions, making success uncertain.

A significant concern lies with the real estate market, accounting for 25% of China's GDP. As demographic shifts and market conditions evolve, mounting debt pressures local governments and real estate companies alike. Some experts even draw parallels to Japan's prolonged economic slump following a real estate bubble burst in the 1990s.

Since Deng Xiaoping's era of reform and openness, China's economy has surged remarkably. Over the past four decades, per capita income has grown 25-fold, lifting around 800 million people out of poverty. Thanks to centralized financial control, the construction industry has flourished, supported by low interest rates that encouraged excessive borrowing. However, the excessive construction now poses a problem, with many unused buildings and infrastructure projects becoming a burden rather than an asset.

China's inability to navigate out of the real estate crisis can be attributed to factors similar to those highlighted in the Wall Street Journal. A notable factor is the nation's failure to effectively lower the high household savings rate through policy adjustments. Despite attempts to stimulate consumption through lower interest rates and easier credit access, households continue to save rather than spend. Social safety nets become crucial in encouraging spending and alleviating excessive saving tendencies.