China’s Diminishing Returns

Gone are the days when China could point to soaring real-estate prices and rising incomes to justify endless new construction. China’s economic slowdown suggests that housing and office prices are headed for a steep fall that could take down banks and local governments, leading to prolonged stagnation.

The Communist Party of China’s 20th National Congress, which gave President Xi Jinping an unprecedented third term as general secretary, also featured a leadership shakeup that replaced market-oriented technocrats with Xi , raising questions about China’s plans for its faltering economy. Excessive state control, after all, is a tried-and-true recipe for becoming mired in the middle-income trap that Chinese leaders have long vowed to avoid.

The breakneck pace of state-guided investment in real estate and infrastructure – China’s go-to stimulus strategy – has generated diminishing returns, with slowing economic growth implying an inevitable fall in housing and office prices. This is especially true in the smaller, poorer, and less-developed cities that collectively account for more than 60% of China’s GDP.

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