China’s Economic Predicament: Struggling Real Estate Sector and High-Tech Shift Under President Xi Jinping
China’s Economic Predicament: Balancing Real Estate Struggles with High-Tech Ambitions
China’s economic landscape is facing a challenging predicament, with a struggling real estate sector and a shift towards high-tech industries creating tensions between political will and economic imperatives. President Xi Jinping’s prioritization of national security and skepticism of market forces are exacerbating the problem, leading to a complex economic situation.
The once robust real estate sector, which accounted for 30 percent of national GDP at its peak in 2018, has experienced a sharp downturn. Compounded by the effects of the COVID-19 pandemic, the sector now operates at only half of its former capacity, with property sales plummeting by 20.5 percent in the first two months of 2024.
Historically, real estate not only served as a financial powerhouse but also drove employment in construction, stimulated retail development, and boosted banking through loans, fostering a cycle of economic expansion. However, as China transitions towards a middle-class society, President Xi’s administration is steering away from this growth model towards high-tech industries such as AI, big data, and quantum computing.
Xi’s ‘Three Red Lines’ policy, aimed at mitigating risks among property developers with mounting debt, has led to reduced residential investment. This shift aligns with a broader agenda to reposition the Chinese economy towards high-tech industries, reflecting global economic trends favoring scientific innovation and smart technology.
However, Xi’s prioritization of national security over economic flexibility, coupled with a skepticism of market forces, complicates this transition. His cautious approach, influenced by past experiences of corruption and ideological deviations, has led to increased scrutiny and limitations on major tech firms, favoring state control over market-driven growth.
The government’s preference for bolstering state-owned enterprises at the expense of the private sector has dampened entrepreneurial spirit and curbed innovation, leading to a noticeable shift in career aspirations among the young towards government jobs for stability.
Despite a 5.3 percent GDP growth in the first quarter of 2024, the International Monetary Fund suggests that China’s economic rebound could take several years, with a medium-term slowdown expected. The manufacturing sector, though showing signs of revival, cannot fully offset the downturn in real estate, leading to manufacturing bottlenecks and subdued consumer confidence.
China faces a dilemma in reigniting growth without reverting to outdated methods, while also balancing Xi’s new economic prescription with political control. The challenge lies in implementing these policies swiftly to ensure a V-shaped recovery and prevent a recession, testing Xi’s ideological framework and commitment to income equality.
As China navigates this economic landscape, the intertwining of governance, ideology, and market dynamics presents a complex challenge that requires a balanced strategy to foster economic vitality while adhering to ideological commitments. China must regain momentum to seize the opportunity for economic rejuvenation before it’s too late.
Dr. Seong-Hyon Lee, a Visiting Scholar at Harvard University Asia Center and Senior Fellow at the George H. W. Bush Foundation for U.S.-China Relations, provides valuable insights into China’s economic predicament in this engaging analysis published by East Asia Forum.
