China’s New GDP Data Shows the Economy’s Biggest Vulnerability Is Growing

Property investment is accelerating in China, which will boost economic growth but restrain the country’s long-term potential

By Mike Bird

Chinese economic growth is holding up surprisingly well, driven by a bump in retail sales and industrial output. But Beijing’s recent stimulus is filtering into real estate, damaging the country’s long-term prospects.

First-quarter economic data show property investment again playing a major role as a driver of growth. It rose by 11.8% in the first three months of the year, the largest year-over-year gain in more than four years, easily outstripping the 6.4% increase in gross domestic product.

Residential buildings in Chongqing, China. Property investment helped buoy China’s economic growth in the first quarter. Photo: Qilai Shen/Bloomberg News

The rise in investment wasn’t as rapid as in earlier years, when growth of 20% or more was common, but the sector has grown far larger, so the expansion comes from a higher base.
Property has become an albatross around the neck of economic policy makers. Beijing is understandably uneasy about clamping down: housing is the main savings vehicle for the Chinese middle class and is vital to the health of the economy, so prices cannot be allowed to decline.

But pouring an ever-greater share of resources into the sector will drag on China’s long-term potential. Last September, research by International Monetary Fund economist Yu Shi pointed to the extent of the problem. Encouraged by the property boom, productive manufacturing firms increasingly shifted resources to the profitable real-estate sector, shaving 0.5 percentage point off productivity growth a year.
Even investors without a particular interest in the country would be wise to keep an eye on what’s happening in Chinese property: as the world’s largest trading economy, what happens in China rarely stays at home for long.

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