China is dealing with economic challenges due to a weak real estate sector and a shift towards high-end industries, worsened by President Xi Jinping’s focus on national security and lack of trust in market forces.
Key Takeaways
- China’s economic challenges stem from a struggling real estate sector and a shift towards high-tech industries under President Xi Jinping’s administration.
- Xi’s skepticism of market forces and focus on national security is hindering economic flexibility and stifling entrepreneurial innovation.
- China faces the dilemma of reigniting economic growth while adhering to Xi’s new economic model and preventing a recession, amidst a narrowing window of opportunity for recovery.
While some believe the situation is not too severe, there are concerns about China’s ability to recover from a major economic downturn if it maintains its current policies, suggesting a potential struggle to regain momentum.
China’s troubled real estate sector
China’s economic predicament is rooted in a struggling real estate sector and a strategy predicated on a shift towards high-tech industries. President Xi Jinping’s prioritisation of national security and scepticism of market forces is exacerbating the problem and leading to tensions between political will and economic imperatives.
China’s troubled real estate sector once accounted for an impressive 30 per cent of national GDP. Its peak in 2018 gave way to a sharp downturn — which, further aggravated by the COVID-19 pandemic, today functions at approximately half of its former capacity. This decline has left a big mark on China’s economic fabric, with property sales plummeting by 20.5 per cent in the first two months of 2024.
Historically, real estate was not just a financial powerhouse but also a catalyst for ancillary sectors, driving employment in construction, stimulating retail development and boosting banking through loans. This relationship fostered a dynamic cycle of economic expansion.
China’s transition towards a middle class society
But as China transitions towards a middle class society, Xi’s administration is steering away from this growth model. The government’s ‘Three Red Lines’ policy — designed to mitigate substantial risks among the many property developers with mounting debt — was a lukewarm response that led to reduced residential investment. The policy indicates Xi’s pivot towards more technologically advanced industries, such as AI, big data, bioengineering, semiconductors and quantum computing.
This shift fits into a broader agenda to reposition the Chinese economy towards high-tech industries, mirroring global economic trends that favour scientific innovation and smart technology. Most importantly, it aims to secure a win in the US–China rivalry.
Xi’s prioritisation of national security over economic flexibility
Xi’s prioritisation of national security over economic flexibility complicates this transition. His deep-seated scepticism of market forces, shaped by the experience of corruption and ideological deviations during former president Hu Jintao’s administration, continues to influence economic policy. His cautious approach has placed increased scrutiny and limitations on major tech firms, reflecting a strategy of economic statecraft that favours firm state control over market-driven growth.
Dr Seong-Hyon Lee is Visiting Scholar at the Harvard University Asia Center and Senior Fellow at the George H. W. Bush Foundation for U.S.–China Relations.
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