Is China's economic model broken?
Since the early 2000s some China watchers have been predicting that the building boom would lead to a crash. Twenty years on they may have been proven right. Global China editor James Kynge and Beijing correspondent Sun Yu discuss what is happening in its real estate sector, what that could do to China’s economy and means for the world
Produced by Tom Griggs, filmed by James Goldman, Donell Newkirk and Gregory Bobillot, graphics by Kari-Ruth Pedersen
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China now badly needs a new growth engine.
China is far more reliant on real estate as a driver of economic growth than anywhere else in the world.
President Xi considers housing policy as the central part of his common prosperity drive.
A lot of people look at green technology as a potential saviour.
The meltdown at Evergrande, the world's most indebted real estate company, has been unfolding in a dramatic way, and it could signal a huge shift in the way the Chinese economy works. It's clear that the economic model that drove China's world-beating growth over the last two decades or more is running out of road. What follows now is uncertain, but it could entail significantly lower economic growth for the world's second-largest economy.
This is important for the whole world because China has been the major contributor to global growth for the past few decades. In the five years to 2018, China accounted for up to one-third of global growth. The problem, however, is that real estate has been driving China's growth for too much and for too long, and that cannot continue forever. China now badly needs a new growth engine.
This footage shows 15 apartment buildings being torn down in the southwestern city of Kunming recently, as these buildings have stayed idle for the past few years. Such things are by no means uncommon in China, as the country is now home to one of the world's largest number of unoccupied apartments.
During my recent trip to the eastern city of Jinan, I found the city is scattered with empty apartments and empty buildings. Many homebuyers were forced to move into these half-built apartments, as local developers were too cash-strapped to finish these complexes.
This chart shows the extent of the problem compared to other countries. China is far more reliant on real estate as a driver of economic growth than anywhere else in the world. Spain is the only place that came close in 2008, and that bubble burst in spectacular fashion.
So Sun Yu, we've had this situation of an overbuilt Chinese property market for a long time. Why are people getting so worried about it now?
The reason people are getting so worried this time is because President Xi Jinping is in power in China this time. And he famously said that "housing is for living, not for speculating." And President Xi considers housing policy as the central part of its common prosperity drive.
Housing affordability in China right now is among the worst in the whole world. As of the end of last year, it would take an average of 25 years of household income in a southern hub of Shenzhen to purchase an apartment. In contrast, the figure is about 13 in London and 8 in New York.
Apparently, President Xi couldn't tolerate this, and he wants things to change. And the solution is the so-called "three red lines," which is three financial ratios, mostly debt ratios, that China's real estate developers must follow in order to gain access to credit. The policy, which was launched last August, has had a huge impact on the industry, as many developers, led by Evergrande, are in deep financial trouble for failing to follow these requirements.
So James, if China's real estate-driven growth model is running out of steam, what will be next growth engine for China?
So the question of what type of growth engine can emerge in China to take up the slack from the sputtering real estate sector is really the $64m question going forward. And I think a lot of people look at green technology as a potential saviour.
China's record in this area is truly remarkable. China's installed more solar power, more wind power than any other country in the world. And in the case of wind power, the amount of wind farm capacity that was added last year was greater than the rest of the world put together.
Also, in electric vehicles, it's quite stunning what Chinese companies are doing. So far, over 40 per cent of all the electric vehicles sold in the world have been sold in China.
You can really tell that the Chinese government is behind this. One of the biggest figures to emerge from China over the last month was an estimate by Zhang Xiaohui, dean of the School of Finance at Tsinghua University, who said that China would need between now and 2060 about $46.6tn to put behind its carbon neutrality drive.
Just to put that number into perspective, that means that every year between now and 2060, China will be investing $1.2tn. That is equivalent to the size of the entire Indonesian economy.
So there's no question that China is really serious about this. It's just too early to say, I think, whether or not this green technology area will be big enough and attract enough investment to really compensate for the flagging real estate sector.
Despite the huge potential for Green Revolution, China still relies heavily on fossil fuel to power its economic growth. Coal-fired power plants currently account for more than 2/3 of China's energy consumption.
Unfortunately, the authority has largely underestimated the situation. In the first eight months of this year, China's coal output grew only four per cent thanks to the closure of hundreds of coal mines across the country. At the same time, the countries of energy consumption picked up by 15 per cent, owing largely to the post-pandemic global economic recovery that boosted China's exports by more than 35 per cent in the same period. So this combined suggests that China is still having a long way to go in making a transition from an economy that's driven by traditional economy by real estate to one that's powered more by renewable energy and other, more sustainable, models.