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China's Economic Turmoil: Can Beijing Salvage the Situation?

China's economic landscape is unquestionably in tumult. The strain on the yuan exchange rate is evident, and despite stringent regulations on capital outflows, both individuals and businesses are finding avenues to transfer funds out of the nation.

While stock prices alone cannot encapsulate the entirety of an economy's well-being, their descent to levels unseen since the conclusion of 2022 echoes a pervasive lack of faith among Chinese households, investors, and private enterprises, especially within the context of a deflationary environment.

At the core of this tumultuous narrative lies the real estate sector. Transaction volumes for properties are plummeting, and the trajectory of declining home prices appears to be accelerating. The economic unease in China is not merely a consequence of zero-Covid policies nor a transient cyclical phase that could dissipate with time and policy adjustments.

Instead, it reflects a profound crisis entrenched within the nation's economic development model. This is exemplified by the most substantial real estate downturn since the transformation of China's housing-welfare system into the world's largest property market.

Even before the pandemic, China was constructing houses at levels that outpaced the needs stemming from projected household formations and first-time buyers. This overzealous construction has resulted in chronic vacancy rates across numerous smaller towns and cities. Consequently, the real estate sector, which once contributed a significant 23%-25% of the GDP, now stands poised for substantial contraction.

The government's role appears limited to managing this decline as transactional activities dwindle. While short-term recuperation might be feasible with a revival of confidence and fiscal backing for housing, the medium-term trajectory remains resolute. If home prices continue their downward trajectory, the repercussions could ripple through property supply chains, financial institutions, and even societal stability.

As the approach of autumn aligns with China's efforts to revive its economy, a pivotal five-yearly party congress, known as the third plenum of the 20th party congress, looms on the horizon. Traditionally, this assembly outlines the strategic economic priorities for the nation. However, the looming uncertainty pertains to whether the present political leadership under Xi Jinping is inclined to confront a myriad of challenges necessitating market-oriented reforms.

These reforms encompass modifications to taxation, social welfare, local government debt, political governance, productivity, and most crucially, income redistribution to invigorate robust consumption. Such reforms clash with the prevailing Leninist stance of Xi's China, as it navigates a river strewn with profoundly intricate challenges.


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