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China’s Struggling Real Estate Sector Faces Arduous Transition

The downturn in China’s real estate market continues. In the first quarter of 2024, sales by the top 100 real estate companies plunged 47.5% year-on-year. Official data show the prices of new homes and second-hand homes (i.e. homes that are not newly constructed) continuing to decline for several consecutive months.

Though the market for non-new homes showed some positive changes, reports indicate that the real estate market’s overall downward trend is unlikely to reverse, with the winter far from over. Major developer Vanke, once considered a “model player” in the industry, saw its 2023 net profit plummet 46.4% and has implemented management pay cuts. Analysts warn that even “quality” developers face default risks while troubled firms like Evergrande remain in limbo, signaling that the market has not yet bottomed out.

Some expect 2024 to be the year that China’s property market rebounds. However, a greater proportion of experts view the downturn as symptomatic of structural issues, with a solution requiring new economic drivers to replace traditional industries like real estate. The “new productive forces” concept promoted by China’s central government places hope in new industrial areas as economic drivers to spur growth. Doubts remain, however, about whether such “new productive forces” can match the enormous impact of the real estate sector on employment and on the broader economy in the short-term.

The current transitional state of China’s real estate market poses major challenges to the economy, including labor mismatch and overcapacity risks. Real estate had been an economic pillar, contributing around 17% of China’s GDP and employing over 15 million. While strategic shifts towards green energy and digital economies are inevitable directions in the long-term, filling the void left by a struggling real estate sector will not be easy.

Source: BBC Chinese, April 15, 2024