China’s economy is recovering but the real estate crisis is worsening

The better-than-expected figures show the world’s second-largest economy gaining momentum, having narrowly escaped a contraction in the June quarter and slightly improved prospects for recovery for the rest of the year.

Industrial production rose 4.2% in August from a year earlier, the fastest pace since March, according to the National Bureau of Statistics (NBS). That beat a 3.8% increase analysts expected in a Reuters poll and July’s 3.8% expansion.

Retail sales rose 5.4% from a year ago, the fastest pace in six months and also beating forecasts for July growth of 3.5% and a gain of 2.7% .

“This is due to a lower basis for comparison – the Delta wave was weighing on economic activity in August 2021,” said Julian Evans-Pritchard, China economist at Capital Economics.

Although the upbeat data lifts some of the gloom weighing on the slow recovery, which had been clouded by weak trade data and sluggish credit growth, Evans-Pritchard does not expect strength continues in September.

“And while the current virus wave may have peaked, activity is expected to remain weak over the coming months amid the worsening housing slowdown, slowing exports and recurring disruptions to Covid-19,” he said.

Investments in fixed assets rose 5.8% in the first eight months of 2022 compared to the same period a year earlier, above an expected rise of 5.5% and up from growth of 5.7% from January to July.

Real estate crisis

In comments after the data, NBS spokesman Fu Linghui said China’s economic improvement in August was “hard-won”, thanks to supportive policies, but warned the recovery was fragile and that global conditions remained complicated.

Contrary to upbeat activity data, China’s real estate sector contracted further in August as house prices, investment and sales extended losses.

Property investment fell 13.8% last month, the fastest pace since December 2021, according to Reuters calculations based on official data.

New home prices fell 1.3% year-on-year in August, the fastest since August 2015, extending a 0.9% decline in July.

Once a key driver of economic growth, China’s property market has gone from crisis to crisis since mid-2020 after regulators stepped in to reduce excessive developer debt.

Woes in the housing market have weighed on the world’s second-largest economy, with policymakers now scrambling to head off a prolonged downturn.

Property sales by floor area fell 23.0% year-over-year in the first eight months of the year, extending the 23.1% drop from the first seven months, reflecting demand still more fragile.

In an environment of low consumer and business confidence, companies are reluctant to expand and hire more workers. The national survey-based unemployment rate fell slightly to 5.3% in August from 5.4% in July. Youth unemployment remained high at 18.7%, after hitting a record high of 19.9% ​​in July.

Policymakers have announced more than 50 policy measures since late May to support the economy and have highlighted this quarter as a critical time for policy action.

A cabinet meeting chaired by Premier Li Keqiang on Tuesday announced extended tax relief for small businesses and an additional 200 billion yuan lending quota for manufacturing industries and social services.

Analysts expect more disruption from tighter COVID-19 controls in September ahead of the ruling Communist Party Congress that begins Oct. 16, where President Xi Jinping is set to break with precedent and to get a third term as leader.

A new economic leadership team, likely to be bolstered next year, will inherit a series of challenges, including questions about how to unravel what many see as an unsustainable zero-Covid policy, housing crisis and tensions increasing with Washington.