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Summary. The financial collapse of Chinese real estate giants Evergrande and Country Garden may mark the end of China's economic miracle. The collapse of China's real estate market is reminiscent of Japan's real estate crisis in the early 1990s, a crisis from which Japan never fully recovered. Although the "Japanification" of China's economy is not an established fact, the country's growth has clearly slowed in recent years.

China's real estate crisis has deep roots in demographic challenges and an oversaturation of the housing market, which along with the economic slowdown has significant implications for both the domestic economy and the global market. It shows how structural problems, such as a declining birth rate and a shrinking labor force, can affect long-term growth and exposes the vulnerability of an economy that relies heavily on real estate and construction for its growth.

Overheated real estate sector

In the news. Evergrande and Country Garden symbolize the overheated real estate sector that is now collapsing, threatening economic growth.

  • China's population growth rate has been negative since 2022. The fertility rate is not enough to renew the population, putting a long-term strain on economic growth.
  • The crisis has led to a decline in construction activity, a drop in house prices and an increase in local government debt. All this contributes to a broader economic slowdown.

Which Asian century?

Zoom in. The collapse of the real estate market has a direct impact on the wealth of households. These have 70% of their wealth invested in real estate. This is causing increased thrift and a decline in consumption.

  • The saturation of infrastructure projects and their diminishing returns undermine further economic expansion. Add to that explosive debt growth among local governments.
  • Chinese stock markets have lost about 30% of their value over the past 2 years. This further erodes the financial security of businesses and households.
  • Emigration from India and China undermines the "Asian century" argument. Many analysts predict that both countries will inevitably dominate global geopolitics.
    • Increasing illegal migration from India and China to the U.S. and data suggesting that skilled workers and the very rich are moving away from the two countries indicate that their upward trend is not assured.

Shifting to a consumption-based economy

Zoom out. The shrinking labor force and declining birth rate are putting pressure on long-term growth. China must navigate between sustaining economic expansion and addressing its aging population.

  • China faces the challenge of shifting from an economy driven by investment and exports to one based more on consumption and technological innovation.
  • While China's advantage in standard low value-added production is declining, competition from countries such as India, Vietnam and Indonesia is increasing, highlighting the need for China to focus on higher technological innovation and productivity improvements.

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