Following the global financial crisis it was widely recognised by China’s policymakers that the national economy must be ‘rebalanced’, with domestic consumption needing to account for a larger share of output and overall investment needing to decline. This has been commonly depicted as a rebalancing away from the ‘old economy’ (secondary industries dominated by SOEs and property) to the ‘new economy’ (service industries and high value-add manufacturing).
What has not been discussed quite so frequently is the fact that, whenever policymakers have needed to stimulate the economy, it has tended to be the constituents of the ‘old economy’ which have been ‘juiced up’. Indeed, the acceleration of the Chinese economy between 2009-11 and 2016-17 was almost entirely driven by the ‘old economy’. More than anything, within that, it is the property sector that drives the big swings in China’s economic growth. Property accounts for some 86% of household wealth, while about 87% of urban households own their own property and 27% own at least one empty investment property. Around 65% of loans are backed by property collateral, and the government funds a majority of its spending through land sales.
Combined, the statistics point to the property market as the lynchpin of the Chinese economy. For all the talk of a consumer-led rebalancing, if Chinese monetary stimulus is going to help drive a reacceleration of global growth this year it won’t be via the Chinese consumer, but instead it will be through China’s property market.
Brendan Mulhern, global strategist, Newton Investment Management.