Why China’s economy is struggling

Downgrades. That's the word that pops into my mind when it comes to economic growth in China these days. The world's 2nd largest economy continues to struggle with a real estate downturn, slowing consumer spending, and geopolitical tensions. And that's raising doubts that the country can even meet its official growth target of around 5% this year. So a lot of economy watchers have recently downgraded their Chinese growth forecasts. That made me curious about where our China economist stands in all of this. So today, I'm speaking with our chief China economist in Goldman Sachs Research, Hui Sha

for having me.

So let's get into it. Hui, we all sat down only May of this year, so only a handful of months ago. And when I think back to that conversation, the narrative went something like this. Chinese growth was much better than expected heading into 2024. Chinese equities are taking off. So it was a very, in some ways, surprising upbeat conversation relative to our prior expectations. But today, it feels like a really different picture. Investor confidence seems to have waned. Obviously, Chinese equities have substantially underperformed of late, and we've seen a slew of global banks downgrading their

So looking back in May earlier this year, at that time, we just got the Q1 real GDP growth, 5.3% year on year, which was above the government's goal of around 5% growth. And then around May, policymakers announced a set of easing policies on the property sector, destocking properties, and trying to stabilize the largest part of the economy. And the combination of good data and policy easing measures got the market excited. At the time, we were characterizing it not too good and not too bad, but rather a stable picture. And activity did slow down quite a bit from May to now we're talking in Sep

Okay. Interesting. Do you think that that slowdown in the consumption side is really just the real estate sector trickling through, or what do you attribute the weakness in the consumer to? I

think the relationship between consumption and the housing market has a bit of ambiguity in there. In the longer term, if Chinese households no longer want to buy properties, they don't need to save a big down payment. If you give them the same income, they can consume more. It's good for the consumption sector if housing is weak and people don't want to buy the second, the third, the 4th apartment. But in the near term, a slowing property sector, a depressed housing market is going to translate into weak economy, fewer jobs, lower income growth, more uncertainty about the future, all of which

Got it. If we dig into these property sector woes that we've been talking about for years now, where are we in terms of that cycle? Are we close to bottoming at all at this point?

From the peak of the market in 2020, well, we're 3 years in. Are we at the bottom? Depends on which indicator you're talking about. The more leading indicators such as land sales, housing starts, I think they are probably around the bottom after declining at least 70% from the peak. But if you look at the total under construction, the floor space under construction or the construction activity, we don't think we're at the bottom yet because that stock of a property under construction only declined around a 20%. Right? So if your starts down 70%, eventually, the total under construction should

But we're basically dealing with an oversupply physical asset. So even though as you mentioned, the Chinese government has taken measures to address it, how much more can they really do to address this problem? I