China’s Economy Slowed Late Last Year on Real Estate Troubles

BEIJING — Construction and property sales have slumped. Due to rising costs, and weak sales, many small businesses have closed. Local governments that are in debt are cutting the salaries of civil servants.

China’s economy slowed markedly in the final months of last year as government measures to limit real estate speculation hurt other sectors as well. Consumer spending was also affected by travel restrictions and lockdowns to stop the coronavirus spreading. A wave of layoffs has been triggered by stringent regulations on everything, from internet businesses to after school tutoring companies.

China’s National Bureau of Statistics said Monday that economic output from October through December was only 4 percent higher than during the same period a year earlier. This represents a further decline from the 4.9% growth in July through September.

The world’s demand for consumer electronics, furniture and other home comforts during the pandemic has produced record-setting exports for China, preventing its growth from stalling. Over all of last year, China’s economic output was 8.1 percent higher than in 2020, the government said. The growth was mainly in the first six months of last year.

The snapshot of China’s economy, the main locomotive of global growth in the last few years, adds to expectations that the broader world economic outlook is beginning to dim. To make matters worse, the Omicron coronavirus variant is spreading in China. This has led to increased restrictions and raised fears about disruption to supply chains.

The slowing economy poses a dilemma for China’s leaders. They have taken measures to reduce income inequality and rein in businesses as part of a long-term strategy to protect the economy. Officials are cautious about causing economic instability in the short-term, especially in an unusually important year.

Next month, China hosts the Winter Olympics in Beijing, which will focus an international spotlight on the country’s performance. In the fall, Xi Jinping, China’s leader, is expected to claim a third five-year term at a Communist Party congress.

With the country’s growth slowing, its demand slackening, and its debt at near-record levels Mr. Xi could be facing some of the greatest economic challenges since Deng Xiaoping, who lifted the country out from its Maoist straitjacket forty years ago.

“I’m afraid that the operation and development of China’s economy in the next several years may be relatively difficult,” Li Daokui, a prominent economist and Chinese government adviser, said in a speech late last month. “Looking at the five years as a whole, it may be the most difficult period since our reform and opening up 40 years ago.”

China also faces the problem of rapid aging, which could create an even greater burden on China’s economy and its labor force. The National Bureau of Statistics said on Monday that China’s birthrate fell sharply last year and is now barely higher than the death rate.

Struggles in the Private Sector

Millions of private businesses have collapsed due to rising costs of raw materials and the pandemic, many of which are small and family-owned.

This is a concern as private companies are the backbone and source of three-fifths (or more) of China’s economic output.

Kang Shiqing invested much of his savings nearly three years ago to open a women’s clothing store in Nanping, a river town in southeastern China’s Fujian Province. However, the number and quality of customers dropped dramatically after the pandemic in the year that followed.

China has seen a shift toward online shopping. This is similar to other countries. It can be cheaper than traditional stores because it uses less labor and operates from smaller warehouses. Despite the pandemic, Mr. Kang was forced to pay high rent for his shop. He finally closed the store in June.

“We can hardly survive,” he said.

Another problem that small businesses face in China is the high cost and interest rates charged by private lenders.

Chinese leaders are aware the challenges private companies face. Premier Li Keqiang has promised further cuts in taxes and fees to help the country’s many struggling small businesses.

On Monday, China’s central bank made a small move to reduce interest rates, which could help reduce slightly the interest costs of the country’s heavily indebted real estate developers. The central bank reduced by approximately a tenth percent of a percentage point the benchmark interest rates for one-week lending and one-year lending.

Construction Stalls

The building and fitting out of new homes has represented a quarter of China’s economy. China has built the equivalent of 140 square meters of new housing per urban resident over the past 20 years thanks to heavy lending and widespread speculation.

This autumn, the sector suffered a major setback. The government wants to curb speculation and deflate the bubble that made new homes unaffordable to young families.

China Evergrande Group, the largest and most visible of a growing list of Chinese real estate developers that have fallen into serious financial difficulties recently, is not the only one. Kaisa Group, China Aoyuan Property Group and Fantasia are among other developers that have struggled to make payments as bond investors become more wary of lending money to China’s real estate sector.

Real estate companies are starting fewer projects to save money. That has been a major problem for the economy. For example, the price for steel reinforcing bars to support concrete in apartment buildings dropped by a quarter between October and November before stabilizing at an even lower level in December.

The decline in home prices in smaller cities has hurt the value of people’s assets, which in turn made them less willing to spend. Even in Shanghai, the apartment prices aren’t rising.

Although there have been some hints of renewed government support for real estate in recent weeks, there is no evidence of a return of lavish lending by state-controlled bankers.

The financial distress of Evergrande “is a signal that money will be pushed from real estate to the stock market,” said Hu Jinghui, an economist who is the former chairman of the China Alliance of Real Estate Agencies, a national trade group. “The policies can be loosened, but there can be no return to the past.”

Local Governments Feel the Pinprick

Local governments have also been affected by the slowdown in housing markets. They rely heavily on land sales for their revenue.

The International Monetary Fund estimates that government land sales each year have been raising money equal to 7 percent of the country’s annual economic output. In recent months, however, developers have reduced land purchases.

Some local governments have been forced to stop hiring and cut benefits and bonuses for civil servants. This has led to widespread complaints via social media.

In Hangzhou, the capital of Zhejiang Province, a civil servant’s complaint of a 25 percent cut in her pay spread quickly on the internet. The municipal government did nothing to respond to a request for comment via fax. In northern Heilongjiang Province, the city of Hegang announced that it would not hire any more “low-level” workers. City officials deleted the announcement from the government’s website after it drew public attention.

In an effort to make up the shortfall some governments have raised fees on businesses.

Bazhou, a city located in Hebei Province, received 11 times the amount in fines on small business owners from October through December than it did in the first nine month of last year. Beijing criticised the city for undermining the national effort to lower the cost of doing businesses.

Exports have their strengths

Strong overseas demand for China’s exports, particularly consumer goods, spurred a national wave of new factory investments, up 13.5 percent last year from 2020.

Some areas of consumer spending are quite strong, such as the luxury sector where sports cars and jewellery have sold well. Retail sales increased by 12.5 percent last year, compared with the pandemic-depressed levels for 2020. Retail sales fell in December, compared to November. This was due to coronavirus restrictions keeping some shoppers at their homes.

Few people anticipate that the government will allow an economic downturn this year. This is despite the Communist Party congress. Economists anticipate the government to ease lending restrictions and increase government spending.

“The first half of the year will be challenging,” said Zhu Ning, deputy dean of the Shanghai Advanced Institute of Finance. “But then the second half will see a rebound.”

Li YouContributed research