[China Risk, Korean Edition] ① "No Savior for Real Estate"... China Commits to Low-Speed Growth

China, burdened by sluggish domestic demand and a stagnant real estate market, is heading toward a 'low-speed growth' trajectory. Early this year, a sharp economic rebound was expected following the transition to a with-COVID policy, but now even achieving the economic growth target of around 5% is challenging. The Chinese government seems to have settled on a policy approach focused on gradual recovery and market restructuring rather than aggressive economic stimulus and easing of real estate regulations. This appears to reflect a willingness to slightly ease growth controls while prioritizing the Communist Party-centered social system, including control and common prosperity, as the highest value.

Restructuring Triggered by Real Estate Insolvency

The darkest shadow recently cast over China is the real estate crisis. Evergrande, the developer that triggered the full-scale market crisis, has filed for bankruptcy protection in a New York court due to financial difficulties, and Biguiyuan, whose project scale is more than four times larger than Evergrande’s, is staggering amid unpaid bond interest. The crisis has spread to the financial sector, with Zhongrong International Trust facing strong investor protests after delaying repayment of matured products. Overall market strength has weakened, with real estate development investment from January to July plunging 8.5% year-on-year, and the cumulative nationwide sales area of pre-sold homes shrinking by 6.5% during the same period.

However, the government appears hesitant to fully rescue insolvent companies or actively intervene to stimulate the market. On the 21st, the People’s Bank of China, the country’s central bank, surprised the market by freezing the 5-year prime loan rate (LPR) linked to mortgage loans, contrary to expectations of a 0.15 percentage point cut. While the 1-year LPR, which influences general interest rates, was lowered by 0.1 percentage points, the 5-year rate remained unchanged. This may reflect a decision to retain room for policy rate adjustments in case of further deterioration, but it is more likely interpreted as a refusal to immediately provide liquidity support to the real estate market.

The market reacted immediately to the Chinese authorities’ passive response. On that day, the yuan exchange rate broke through 7.3 yuan per dollar intraday, and foreign capital in A-shares via Hong Kong outflowed 6.412 billion yuan (approximately 1.1797 trillion won), marking 11 consecutive trading days of capital outflow. This was fueled by concerns over stagnation after retail sales (2.5%) and industrial production (3.7%) growth rates in July fell far short of expectations, and the government decided to suspend the release of the youth unemployment rate (ages 16?24), which had reached a record high in June.

Growth Slows but No Systemic Crisis

Some have likened the recent real estate risks in China to a 'China-originated Lehman Brothers' scenario that could paralyze the local financial system and trigger a global recession. However, the prevailing assessment is that the situation is controllable, given that the initial real estate market crisis was a predictable outcome of the Chinese government’s regulatory tightening and part of a scenario prepared for restructuring.

The situation worsened due to weaker-than-expected housing demand during the intended restructuring process, but the risk spreading to the formal financial sector is unlikely. In fact, the policy response capacity of the financial sector and households remains ample, including interest rates, and indicators closely related to people’s livelihoods, such as basic living consumption and service retail sales like dining and accommodation (20.3% in July), were favorable.

Within China, the recent concerns over real estate insolvency are diagnosed as inevitable changes arising from the transition of the urbanization model. Professor Wei Zhe of the Economics Department at Renmin University of China recently released a data analysis report in the August issue of the China Macroeconomic Forum (CMF) Monthly, stating, "The causes of the recent real estate downturn are very complex, involving both structural and cyclical factors," and evaluated that "as the urbanization rate approaches 65%, China’s urbanization model, which was land-centered, is entering an era of people-centered accumulation." He added, "Along with demand-side changes such as population decline, supply-side changes characterized by previously high leverage and turnover are also emerging," advising that "it is necessary to shift the financing mechanism for urban redevelopment to REITs and optimize policies further by relaxing loan restrictions and lowering down payment ratios."

Global financial institutions have been lowering their GDP growth forecasts for China this year amid concerns over economic slowdown, but these forecasts do not assume a severe recession or financial system collapse. The concern is mainly about a slowdown from early expectations of growth in the low 5% range to the mid-to-late 4% range.

Chao Hong, Chief Economist for Greater China at Bank of America, emphasized at the CMF meeting, "China’s economic growth has bottomed out, and better conditions are expected in the fourth quarter," adding, "The industrial sector is cooling, but the service industry is recovering rapidly, which is an important factor supporting the economy in the short term." He also observed, "Due to the real estate downturn and reduced external demand, a significant rebound in the industrial sector in the second half of this year is unlikely." Zhu Haibin, Chief China Economist at JPMorgan Chase, said, "Fiscal and monetary policy adjustments are necessary, but large-scale economic stimulus is not," and added, "Moderate adjustments such as industrial upgrading and political guarantees for private enterprises are sufficient."