Part 2: Is there more to China’s housing woes than meets the eye?
May 13, 2025
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8 min read
Mabrouk Chetouane: For me, 5.4% represented a good GDP figure for China in Q1. Should this be seen as evidence of a slight recovery, the beginning of a departure from the gloomy situation we have seen over the past two years, or is it solely explained by temporary factors, in particular the significant front-loading of purchases by US importers?
Bo Zhuang: There are a couple of points to make, the first is that Q1 gross domestic product (GDP) is backward-looking. Second, while Q1 GDP broadly surprised on the upside compared to the market consensus, it wasn’t all positive. We do get 5.4% year-on-year GDP growth, which is in line with Q4, however the measure used to adjust GDP for inflation, known as the GDP deflator stayed negative. It was -0.8% year on year in Q1, which means China was still suffering from deflation. And, because of that a flat number can be seen as evidence of a recovery. If you look further into the data, what we find are improvements in some areas and missed expectations in others.
So, what were the key drivers? The first was the front-loaded exports, as you mentioned, the second was the consumer subsidy programme. Basically, the government continued to support the consumer trading scheme. For the past four months of last year, the Chinese government spent around 150 billion to boost consumer spending and it mostly included orders for white goods. This year they announced another 300 billion in subsidies over the year, and they have included more categories of consumer products such as mobile phones, laptops and other consumer gadgets. And because these are higher ticket items, the government estimates that it has succeeded in boosting retail sales by around 1 to 1.5%, which is quite a significant sum. It is important to note, too, that this isn’t just at the national level, it is also at the local government level. Specifically, let’s say capable, local governments – or rather, the ones with the fiscal firepower to do so - have also chipped in. So, this consumer subsidy programme has been quite successful.
On the other hand, the housing market remains a concern. Chinese house sales turned positive year-on-year in Q4 2024, helped by the easing programme implemented by the government in September and October. However, over the first quarter of 2025, housing sales year on year growth have actually turned negative again. In other words, the green shoots that were starting to become evident in the housing sector have actually dissipated and turned into a drag. More broadly though, any view on China should be framed by the fact that China is still suffering from deflation, and that will impact how it acts and interacts.
MC: You have anticipated my next two questions, actually. The first relates to the real estate market. We have already seen a massive monetary package being implemented by the People’s Bank of China in September 2024. What is the next step? Do you expect the rebound we saw at the end of last year to continue, or are there other factors to worry about?
BZ: I think we are in the latter stages of the property adjustment cycle. After almost four years of house price correction, we have begun to see a stabilisation in prices, including second-hand house prices in the tier 1 cities – Beijing, Shanghai, Guangzhou, and Shenzhen. And typically, what happens in the tier 1 cities tends to be seen a little later in the tier 2 and tier 3 cities. As such, we believe we are likely to see a stabilisation in the confidence of potential buyers, albeit at a lower level of transaction volumes.
The other thing to note is that we believe China's housing cycle is moving into a new phase. Because they have been focused on housing completions, there aren’t too many new housing units being built, which means that China’s housing sector will likely be entering into a lower delivery and lower transaction stabilisation stage.
That said, there are two key issues that need to be addressed. One is the very high inventory level in the lower-tier cities. Basically, these cities have over built, and there is no easy way of destocking. Time will be the only solution for this problem.
The other is perhaps less of a worry, but still worth noting, and that is local government property financing. Effectively, local governments have been relying on land sales as a way of funding infrastructure investment. But , after three or four years of decline, the land sales have been squeezed dry and now it is only state-owned enterprises that are buying the land, which means local governments are turning to bond issuance instead of land sales for their Infrastructure investment.
As a result, going forward, both local government and central government financing is more likely to rely on bond issuance. Unless they are willing to significantly increase their balance sheets, which we see as unlikely, we expect the property cycle will likely become a smaller drag and possibly could end up having neither a positive nor negative impact on GDP over the course of the year.
MC: My other question is related to the deflationary pressures you mentioned, and whether, you think this is temporary or something more structural. And related to that, does that mean you are expecting the government to adopt a more aggressive fiscal policy in order to extricate themselves from these deflationary pressures?
BZ: I think there is a secular deflation trend in China. One of the key reasons is because China has basically tried to expand production too much. There is a significant overcapacity issue. China wants to expand market share, and the way it approached this was to compete on cost. But, in order to lower costs sufficiently, they have to produce a lot from an economies of scale perspective. At the same time, domestic demand has not picked up because wage growth hasn’t risen.
This is another important difference that’s worth explaining. In China, household wealth is not a key factor for household consumption; instead, wage growth is the biggest factor influencing Chinese consumption. And, because the Covid pandemic had such a big impact on the Chinese services sector, wage growth has been hit negatively. As a result, Chinese household consumption has remained stagnant.
As such, we believe China will likely continue to suffer from deflation and, to make things worse, you now have a tariff war, which will likely see more consumer goods being sold domestically. So, at this point, everything seems to be pointing in one direction: lower prices for everything Chinese.
Written in April 2025, before the US and China trade agreement that was announced on 12 May
