Does demography spell doom for China's property market without greater macroeconomic intervention?

Chinese consumer subsidies could become a "normalized policy" in response to protectionist Trump administration.

Our briefing on critical economic and financial developments in China as of Friday, 29 November, 2024:

• China’s demographic peak could have dire ramifications for the property market and broader Chinese economy unless Beijing engages greater macro-policy intervention.

• China's 2024 consumer subsidies could become "normalized policy" as Trump administration tariffs loom.

Why China's demographic shift is the chief culprit for its property crisis

A leading Chinese economist argues that unrelenting changes in China's demographic structure are the chief cause of weakness in its property markets, which could have adverse spillover effects for the rest of the economy.

Yin Jianfeng (殷剑峰), chair of the Shanghai Institution for Finance & Development and chief economist at Zheshang Bank, imputes China's problems with both the property market and domestic demand to demographic changes that commenced at start of last decade.

He points out that China's working-age population of people aged from 15 - 64 reached a peak of 74.53% of the total population in 2010.

This signalled the end of the "demographic dividend" that drove China's economic growth for more than three decades of the country's post-Mao reform era.

By 2015 China's working-age population reached its peak, while by 2021 its total population also struck the same fateful milestone.

"The current problem of insufficient demand has appeared following the peak in population, compounded by changes in the external environment," Yin writes.

"At present, the biggest factor affecting the real estate sector is demographics.

"Following the peak of China's working-age population in 2015, any vigorous development of housing that runs counter to population trends is the equivalent of artificial increases in housing supply, and will cause prices to face pressure."

Property remains the key to China's economy

Given that housing remains one of the critical pillars of the Chinese economy, Yin argues that demographic-driven decline of the sector will have major spillover effects for the domestic economy.

According to Yin, real estate and related indirect investment continued to comprise almost half of China's national fixed asset investment as of August 2024.

A survey by the People's Bank of China conducted in October 2019 also found that real estate comprised over 60% of Chinese household assets in urban areas.

"The performance of consumption and investment is deeply influenced by any adjustments to the real estate sector," Yin writes.

China's ongoing struggle with lacklustre inflation is also significantly due to weakness in the real estate sector.

Yin notes that ever since the start of housing price declines in 2021, year-on-year growth in China's core consumer price index (CPI) has languished beneath the 1% threshold - a level which is considered deflationary by international standards.

Housing is the second biggest component after food in the basket of goods that China uses for its CPI, with a weighting of 20%.

"The ongoing weakness of core CPI growth is directly related to the decline in housing prices," Yin writes.

Macroeconomic policy will need to play a bigger role

In order to deal with the adverse economic effects of its demographic peak, Yin believes China will need to make greater recourse to the use of macroeconomic policy adjustments in future.

When it comes to monetary policy, Yin advocates greater use of measures that specifically target the real estate market.

"There is considerable space when it comes to the vigour of a real estate rescue in China right now," Yin wrote.

"For example, there is still room for further downward adjustments in the overnight lending rate, the loan prime rate (LPR) and the public fund loans rate."

Yin pointed to the US as an example to follow, where the Federal Funds rate fell from more than 5% to 0% in the space of under two years.

"In comparison, the intensity and pace of adjustments to China's regular interest rate policy still await acceleration.”

Yin also advocates increases in the base money supply via the increased of Chinese treasuries by the central bank.

This would be complemented by fiscal policy that would involve Beijing issuing more treasuries, to rationalise an imbalance in the debt structure shared by China's central and local governments.

He points out that since 2015, the debts of China's local governments have increased, due to the central government delegating to them the role it should bear itself when it comes to counter-cyclical macro-economic adjustments.

“For this reason, China’s broad government leverage ratio is markedly lower than that of the US and Japan, but most of it consists of local government debt, a structure which isn’t entirely rational.”

Consumer subsidies in China become “normalized” in responses to Trump’s tariff threat

Leading Chinese economist Wen Bin (温彬) expects policymakers in Beijing to continue to focus on boosting consumption via subsidy policies in their bid to revive flagging growth, as well as deal with the impacts of tariffs promised by incoming US president Donald Trump.

"At present, China's economy faces the problems of insufficient demand and weak consumption," wrote Wen, chief economist of Minsheng Bank, in a recent opinion piece.

"Consumption in one of the three key drivers of economic growth, and is extremely important to the development of the national economy."

In order to remedy this dilemma, since the start of 2024 Beijing has unveiled an "old-for-new" consumer subsidy policy, with the goal of lifting household consumption of durable goods including automobiles and household appliances, alongside home decorations and kitchen fittings.

The policies were launched in two rounds that have had highly mixed results.

The first round that was unveiled from March to April initially had no positive impact on automobile, household appliances or furniture sales, all of which saw year-on-year growth post declines by May.

A subsequent round of policy support, however, yielded more positive outcomes. Sales of household appliances entered positive territory in June, while by September auto and furniture sales both saw positive sales growth.

Wen imputes the follow-up success of the old-for-new consumption policy to several causes:

• Expansion of funding and subsidy support, with China's central government allocating 150 billion yuan in the second round of the policy. The second round also saw the introduction of further subsidies for automobiles and household appliances.

• The introduction of more complete ancillary measures. This included optimisation of subsidy assessments and fund allocation procedures.

• Expanding publicity for the policy, including online and offline campaigns to drive spending by Chinese consumers.

• The impact of accompanying macro-economic policies intended to stimulate growth and boost China's economic health. These include reductions to rates on outstanding mortgages, cuts to the required reserve ratio and the policy rate as well as fiscal stimulus policies.

Wen sees Beijing stepping up these policies in the near-future, particularly given the effectiveness of the intensified second round of measures.

"Old for-new could become a standardized policy for expediting consumption," Wen wrote.

"The comprehensive launch of old-for-new subsidies in areas including electric bicycles, home fittings and kitchen furnishings will hopefully further raise consumption."

Wen cautions, however, that other factors could continue to constrain China's domestic consumption levels including:

• Weak income expectations.

• Weak employment expectations.

• The ongoing inadequacy of social welfare measures.

For these reasons, Wen counsels "strengthening the coordination of policy, to ensure that stable employment and improvements to living standards are all in place."