Business Matters | Is China’s economy in the doldrums?

watch china’s real estate sector has dipped, and the country’s increasing ageing population isn’t helping matters either

A recent Bloomberg article had a headline that caught my eye: Wall Street Snubs China for India in a Historic Markets Shift.

Often, but not always, stock market movements are indicative of what is happening in an economy. In today’s episode, let’s see what has been happening in China on various economic fronts. 

Chinese stock market indices have fallen given concerns around the economy. Japanese newspaper Nikkei reported that on February 5, the Shanghai Composite Index touched its lowest close in four years. In the week ended February 2, the index fell 6.2% in its biggest weekly loss since October 2018. 

China’s biggest real estate developer, Evergrande, which was in the news recently for having too little funds to pay too much debt, went into insolvency a fortnight ago. In a sector that accounts for about 20% of the world’s second-largest economy, such a large entity going into insolvency sounds alarming. 

But it does look like the bad news has been on the horizon and has finally hit the industry. The IMF notes in a recent blog that the reliance on real estate for economic growth has been accompanied by the buildup of significant risks. 

The Fund says that home prices became significantly stretched relative to household incomes in the decade before the pandemic, in part because consumers preferred to invest their considerable savings in real estate given the scarcity of attractive alternative savings options. 

CNN estimates that more than 2/3rds of household savings are tied to the real estate sector. Why so? Expectations of continued increases in home and land prices allowed property developers to borrow rapidly, with land sales providing crucial revenue for local governments, according to the IMF.