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China economy
OpinionComment
Michael Pettis
Michael Pettis

Opinion | Painful as it is, China must rid its economy of an ever-rising property market

  • It will be impossible to wring speculation out of the sector without much lower prices and a significant increase in financial distress
  • But the longer the economy is dependent on an ever-rising property market, the higher the economic costs of reform

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The construction site of a China Evergrande Group development in Wuhan is seen on December 22, 2021. Evergrande is the world’s most indebted developer. Photo: Bloomberg
Michael Pettis
Mainland developers have seen their share prices surge recently on rumours that the government plans to revive the property market. This worries many analysts who had assumed Beijing was serious about reining in the out-of-control sector.
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Even with prices having declined in the past two years, and the sharp fall in property-related activity, China needs a further substantial contraction in the role of real estate in its economic activity. Property prices relative to household income are still two to four times in China what they are in the rest of the world, and the sector accounts for more than twice the share of economic activity.

But Beijing is backtracking because reining in the sector was far more painful than policymakers expected, and has caused a more vicious spread in economy-wide financial distress than anticipated. Beijing probably hopes to find a less disruptive set of policies that can accomplish the “houses are for living in, not for speculation” mantra.
But this may be harder than policymakers think. It wasn’t an accident, or the result of misguided policy implementation, that the property sector contraction has been so painful. It was the consequence of how large parts of the Chinese economy had become systematically overexposed to the sector.

This was inevitable when economic agents – including developers, businesses, banks, households and local governments – had been encouraged over decades into directly and indirectly reinforcing the overextension of the sector. It is precisely why the eventual adjustment was always going to be far more difficult than regulators expected.

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There is nothing new about this process, as anyone familiar with the history of real estate crises around the world can confirm. The property sector is such an important part of any economy that any substantial long-term trend in prices and activity cannot help but reorient the economy.

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