This article first appeared in The Edge Malaysia Weekly on December 4, 2023 - December 10, 2023

THE significant slowdown in China’s property market in recent years was intentional and while this may have contributed to a deceleration in the country’s economic expansion, the growth is healthier from a broader perspective, says McKinsey & Co senior partner Jonathan Woetzel.

“I would say the current situation in China is exactly what should have been, and was expected, from a policy perspective,” Woetzel tells The Edge in an interview. Based in China since 1985, he is also a director of the consulting group’s business and economics research arm, McKinsey Global Institute.

While people expected the economy to rebound more strongly than it did post-Covid on the back of deferred consumer spending, Woetzel says what was perhaps overlooked by many was  the impact of China’s deleveraging campaign, or monetary tightening to control informal credit, on the real estate market.

“The deleveraging started back in 2015. It takes a lot to slow down the Chinese real estate [sector], but yes, [it got done]. That was very intentional. Having real estate activities as 30% of your annual GDP (gross domestic product) growth is not a healthy situation,” he says.

He goes to explain, “There [had been] a lot of speculative activity, and as that led to high-profile bankruptcies, the government essentially said, ‘Well, now, we will now put the lid on that and require developers to put up more equity finance and reduce the ability of intermediaries to flip properties and, in general, slow the thing down’.

“And with that, land sales have dropped dramatically and all that is very intentional. The actual point of this was to reduce the share of real estate in the economic growth of the country, and it did so.”

China’s real estate sector had been red hot before regulators in 2020 started cracking down on developers’ high reliance on debt to fuel growth. In 2021, the country’s top developer Evergrande Group defaulted on debt, sending the sector into a crisis. Since then, more developers have run into similar troubles, sparking worry about the economic fallout.

Woetzel opines that one should not be overly concerned about China’s economy. As the world’s second-largest economy after the US, it accounts for a substantial portion of global GDP growth.

“You shouldn’t worry too much about the Chinese economy. With a savings rate of 40% [of GDP, it] can go a long time. Over the course of the two or three years of Covid, the incremental growth in household savings in China was equivalent to the entire GDP of the UK,” he says, making a point about the massive level of savings in China.

“All that savings has to go somewhere, and if it is not going into real estate, where is it going? I think that’s a big challenge for the Chinese financial system. What we can see now when we look at the numbers is that the technology-oriented sector is what’s growing as a share of GDP. So, somehow that money is finding its way, inefficiently perhaps, into that section of the economy. That’s a change in [the economic] mix,” he adds.

“So, we certainly have a slower rate of overall growth, but from a broader perspective, that may be healthier. There’s still clearly a challenge to mobilise demand. Demand has fallen, and that money sitting in savings is not stable, [it’s just] cash piling up there. So, that’s the risk, essentially.”

Woetzel was in Kuala Lumpur recently as a speaker at Bank Pembangunan Malaysia Bhd’s 50th anniversary forum.

He does not foresee the Chinese government undertaking bailouts of troubled property developers.

“I think the kind of support we’re seeing is that, if some [company] has an inability to pay its debt, to complete its projects, it will be given enough funding to complete the current set of projects, and that’s it. And then the entity will be merged with some other entity, and the management will be replaced. That’s what happens in China,” says Woetzel.

“So, the interests of the consumer, the individual investor, are protected. But beyond that, the corporate entity is effectively wound out. So, I wouldn’t count on too many bailouts.”

China may, for the first time, allow banks to offer unsecured short-term loans to developers on a “white list” of 50 developers, Bloomberg reported recently, citing unnamed people familiar with the matter.

Last week, amid the escalating property gloom, China’s central bank governor Pan Gongsheng said the economy remained resilient and was expected to achieve the growth target of about 5% this year and would see “healthy and sustainable growth” in 2024 and beyond.

The 5% growth rate projected for this year — the country’s lowest growth target in decades — would be an improvement from the expansion of 3% last year, but slower than the 8.1% of 2021. Growth sank to 2.3% in 2020, the first year of the pandemic, but it was the only major economy to report GDP growth.

“China is experiencing a transition in its economic model,” Pan reportedly told an audience of international bankers at a conference in Hong Kong on Nov 28. “High quality, sustainable growth is far more important.”

He said the country is moving away from manufacturing and real estate — its traditional drivers of growth — towards a newer economic model driven by consumption and services.

In early November, the International Monetary Fund raised its growth forecast for China to 5.4% from 5%, citing the country’s better-than-expected third-quarter growth of 4.9% year on year as well as the approval of a RMB1 trillion (RM653.7 billion) sovereign bond issuance to support the economy. However, the IMF still expects the economy to grow by a slower 4.6% next year amid continuing weakness in property demand and subdued external demand. 

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