China's Economic Landscape: Real Estate Struggles Amidst Signs of Sectoral Stabilization

China's real estate sector continues to lag despite government interventions aimed at reviving the industry, contrasting with signs of stabilization in other economic sectors.

In the first two months of this year, new property sales totaled 1.06 trillion yuan ($147 billion), marking a significant 29.3% decline compared to the same period in 2023. This drop represents a much sharper downturn compared to the minimal 0.1% decrease observed a year ago. Additionally, property investment plummeted by 9% during January and February, outpacing the 5.7% decrease recorded in the corresponding period last year.

Capital Economics analysts note that the correction in property construction is still at an early stage and anticipate a further halving of construction activity in the coming years, potentially dampening economic growth over the medium term.

However, there are brighter spots in the economy, with consumption, industrial production, and infrastructure investment showing signs of improvement. Retail sales rose by 5.5% year-on-year in January-February, slightly surpassing analysts' expectations. Growth was particularly robust in catering services, telecoms, cigarettes and tobacco, as well as sports and entertainment services.

Yet, the sustainability of this improvement remains uncertain, with Oxford Economics' China economist Louise Loo attributing the temporary boost in consumer spending to festive-related expenditures at the beginning of the year.

Industrial output surged by 7% in the first two months of 2024 compared to the same period in 2023, exceeding expectations. This growth aligns with the positive trend indicated by the strong Caixin manufacturing Purchasing Managers Index (PMI), which has expanded for a fourth consecutive month.

Factory output growth may be bolstered by robust export demand, as evidenced by a 7.1% increase in exports from January to February compared to the previous year, surpassing market forecasts.

Fixed asset investment, predominantly driven by state-led initiatives, grew by 4.2% in the first two months of 2024, surpassing analyst projections.

However, the downturn in the property sector and subdued domestic demand highlight the need for additional policy support to sustain overall economic growth. Oxford Economics' Loo emphasizes the importance of consumption-related stimulus measures, including incentives for replacing old durable goods with new ones, to bolster consumer spending.

Looking ahead, Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, underscores the uncertain economic outlook for the second quarter, advocating for more robust fiscal policy support to ensure a sustainable recovery amidst ongoing challenges.