China's property sector, once considered a major driver of economic growth, has undergone significant reforms in recent years. These reforms were initiated to curb speculative investments, address housing affordability issues, and reduce financial risks. However, the government's measures to rein in the property sector have had repercussions on the country's GDP growth.
China's property sector contributed significantly to its GDP growth for years, but its rapid expansion led to concerns of a housing bubble. In response, the government introduced measures such as stricter lending requirements, property purchase restrictions, and increased scrutiny on developers. While these reforms were necessary for the long-term stability of the economy, they have led to a slowdown in property-related investments and construction.
China has 3 options or a combination of the 3 options to offset the property sector decline:
Export Expansion: China can bolster its GDP growth by increasing exports. By tapping into global markets and diversifying its export base, the country can compensate for the slowdown in the property sector. Trade agreements and partnerships with other nations can facilitate this effort.
Promoting New Technologies: Embracing innovation and promoting new technologies, such as EVs and green energy, presents a promising avenue for growth. China has already made substantial investments in EV infrastructure and technology. Expanding its presence in the global market for these technologies can create new jobs and stimulate economic growth.
Stimulating Domestic Consumption: Encouraging domestic consumption can drive GDP growth. Policymakers can implement measures like tax cuts, social safety nets, and wage increases to boost household spending. This would reduce the economy's reliance on exports and property.
If the above measures are not sufficient, China may have to accept lower GDP growth as a consequence of these necessary property reforms. By focusing on quality over quantity and sustainable development, China can mitigate economic volatility. China's ability to adapt to these changes, even if it means tolerating a lower GDP growth rate, will determine its economic trajectory in the years to come.
We continue to be overweight Chinese tech (Naspers /Prosus) and underweight commodity companies due to this current shifting of China’s GDP mix.