China’s Property-Market Party Is Over

T he late American Enterprise Institute economist Herb Stein famously wrote that if something cannot go on forever, it will stop.

Mr. Stein might very well have had in mind the unsustainable, decade-old, property and credit-market bubble in China, which is now showing every sign of bursting. Compounding matters, it is doing so at the very time when the Chinese economy is experiencing a perfect economic storm as a result of President Xi’s zero-tolerance Covid policy, his attack on big business, and his ramping up of political tensions with the United States over Taiwan now coinciding with a severe drought. A Chinese economic slowdown would have major implications for the world. Not only is China the world’s second-largest economy; until recently, it was also the world’s main engine of economic growth and its largest consumer of internationally traded commodities.

Over the past decade, China’s economic miracle was heavily based on an unsustainable property and credit-led economic-growth model. That led to a situation where private-sector credit grew by more than 100 percent of GDP: a pace of credit expansion faster than that which preceded Japan’s lost economic decade in the 1980s, or that which preceded the 2007 bursting of the U.S. housing and credit-market bubble.

There are now all too many indications that China’s property-market party is coming to an abrupt end. Among the first signs of trouble was last year’s debt default by Evergrande, the world’s most heavily indebted property developer. Since then, some 20 other Chinese property-market developers have followed with similar defaults, while Chinese property prices have steadily fallen.

This property and credit-led growth model has also contributed to a highly unbalanced economy: The Chinese property sector now accounts for as much as 30 percent of its economy, or almost double the comparable ratio for the United States. Meanwhile, the country has an estimated 65 million unoccupied housing units, house-price-to-income ratios in major Chinese cities are appreciably higher than those in London and New York, and housing represents around 70 percent of Chinese household wealth. Moreover, Chinese local governments are unhealthily dependent on land sales for revenue. Any sustained slowing in the property sector must now be expected to be accompanied by cutbacks in local governments’ social expenditures, which could ripple throughout the Chinese economy.

Further clouding the property sector’s outlook and heightening social tensions is the recent mortgage-payment boycott by more than 1 million Chinese households. Angered by the property developers’ failure to complete fully paid-up housing units, these households are now refusing to service the mortgages they used to finance those purchases, burdening banks with non-performing property-sector loans.

Recent political decisions have hardly helped the property sector. By locking down more than 350 million workers, including those in big cities like Shanghai and Beijing, President Xi’s zero-tolerance Covid policy has resulted in the Chinese economy’s screeching to an abrupt halt. In the year ended in the second quarter, the Chinese economy eked out barely 0.4 percent growth. That fell well short of the government’s 5.5 percent target. Even once it exits its zero-tolerance Covid policy, China’s deep-seated property-sector problems make it highly improbable that the country will regain its past, rapid economic-growth pace. Rather, it is more likely that, like Japan before it, China will now experience a lost economic decade.

In the event that the world economy does succumb to a recession next year, it will not be able to count on a rapidly growing Chinese economy, as was the case in the 2008–09 Great Recession. Over the long term, no longer will the world be able to count on China as its main engine of economic growth, and no longer will emerging market economies be able to count on another Chinese-driven international commodity boom.