The Chinese Communist Party has been trying to offset the drag of the declining real estate market on its economy by relying on its manufacturing industry and export engine to achieve its growth target. However, the resistance facing these engines is increasing, and the situation is getting worse.
Data released by the Chinese National Bureau of Statistics on August 31 showed a sharp drop in China’s factory gate prices in August. Enterprises find it difficult to obtain orders, and Chinese factory activity has contracted for the fourth consecutive month. The new orders index was 48.9 in August, lower than July’s 49.3, indicating a decline in demand in the manufacturing market.
In particular, new export orders in August have been below 50 for four consecutive months. The Wall Street Journal said that this is a bad sign for this crucial growth engine. In the past few months, the export industry has helped offset the impact of weak domestic demand.
However, with the escalating trade disputes caused by the influx of cheap Chinese products into the global market, several countries have taken measures to restrict the export of Chinese products. This not only makes China’s exports worse, but it may also worsen China’s problem of overcapacity.
The United States and the European Union have taken separate actions to impose new trade barriers on Chinese products. The impact of the EU’s new tariffs was already evident in July, with a decrease in the number of electric vehicles registered by Chinese automakers in Europe.
Adding to the woes, not only is external demand for Chinese exports under pressure, but the latest real estate sales data shows that the decline in residential sales in China in August has further expanded. Expectations of further price declines in new homes are hindering the authorities’ efforts to mitigate the economic downturn.
A report released by China’s third-party research institution, Ke Ruier Real Estate Research, on August 31 revealed that in August, the top 100 real estate companies in China achieved a sales turnover of 251.2 billion yuan, a decrease of 10% from the previous month and a 26.8% decrease year-on-year. The sales decline continued to remain at a historically low level.
The real estate industry plays a huge role in the Chinese economy, accounting for a quarter of the total economic output at its peak. However, it has gradually fallen into crisis since 2020 and has now become a drag on the Chinese economy. Despite the Chinese government’s multiple rounds of rescue measures, the real estate crisis, which has been ongoing for three years, has yet to hit bottom and remains a major headache for the authorities. Real estate investment continues to decline significantly.
China’s tightening monetary policy is also dealing a heavy blow to the economy.
According to Bloomberg, economists from Goldman Sachs, Yuting Yang and Andrew Tilton, pointed out that the price index in the manufacturing survey of the National Bureau of Statistics of China indicates a significant rise in inflationary pressures.
Economists from UBS Group AG, Credit Suisse Group, and JPMorgan Chase & Co. predict that China will struggle to achieve its 5% economic growth target this year. Credit Suisse economists recently downgraded their forecast for Chinese economic growth from 4.9% and 4.6% to 4.6% and 4.0% for this year and next, respectively. This downward revision reflects Credit Suisse’s expectation that the soft real estate market in the coming months will further drag down Chinese household consumption and the overall economy.
Barclays economists stated in a report to clients last week that the data released that week showed a general decline in tax revenue, indicating that the fundamentals of the Chinese economy may be more worrisome than reflected in official growth figures.
Barclays economists also noted that with the intensification of soft domestic demand exacerbating overcapacity problems, price wars or price cuts are becoming increasingly common across industries, and competition is fierce. Declining profits could lead to pay cuts and layoffs, which is not a good sign for consumption.
Amid China’s continued economic downturn, local financial difficulties, and soaring debts, many local governments have set up special teams to tackle heavy debt issues through various means.