China Shrugs Off Tariffs But Not Its Property Slump

China’s export engines continue to defy President Donald Trump’s tariff campaign. But more worryingly for policy makers in Beijing, the years-long property slump may be worsening again, with no end in sight.

With trade tensions stealing the headlines, the latest deterioration in China’s property market has been somewhat overshadowed. But not in Beijing’s policy circles: At a State Council meeting last Friday, Premier Li Qiang pledged action to make the real estate market “stop declining.”

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Days later, data showed China’s new-home prices fell the most in seven months in May and residential sales by value declined 6.1% from an already low base a year earlier. Real estate investment saw a deepening decline, slumping 12%.

Bloomberg Economics’s property dashboard shows the deterioration:

Economists at UBS including Wang Tao expect that ongoing weakness will prompt more policy support in the second half, including a 20 to 30 basis point cut in the key policy rate and additional fiscal stimulus equating to 0.5-1 percentage point of GDP.

There are some glimmers of good news: Government purchases of homes continued to help clear some excess inventory. As of May, Bloomberg Economics estimates show it will take 5.24 years to absorb unsold floor space, down marginally from 5.26 years in April. This extended a gradual trend down from a peak of 5.6 years in the third quarter of 2024.

That’s still a multi-year cloud hanging over the world’s second-largest economy.

Economists at ANZ Research see a structural transformation in property over the next decade as the market transforms from one led by construction to one led by services.

Construction Slump

Senior China Strategist Zhaopeng Xing forecasts property construction will decline another 30% by 2035, with more than 50% of new demand stemming from upgrading, instead of urbanization. That’ll make rent rather than prices crucial to stabilizing the sector as migrant workers and university graduates fuel rental demand.

The long-term takeaway: The overall importance of property to China’s economy will continue to decline, and as such there will be no big stimulus to support it. “The decrease of construction activities will be irreversible,” Xing wrote in a recent note. “Policy focus will be on destocking and affordability going forward.”

But for now, the two-speed growth model of strength in exports and weakness in property continues. Macquarie’s Larry Hu says the balance between those two key growth drivers will shape policy outcomes for the rest of the year:

More money doesn’t always mean better outcomes, especially when it’s chasing the wrong target, according to Luci Ellis, who was previously the chief economist at the Reserve Bank of Australia, referring to Trump’s call for countries around the world to boost military spending to above 2% of GDP.

Once a metric becomes a target, it can stop being useful and history offers plenty of examples: call centers chasing volume over resolution or companies focused on the number of sales calls, rather than actual sales or profits. And defense is no exception, said Ellis who is now the chief economist at Westpac, one of Australia’s four largest banks.

Building bases in the wrong places or buying overpriced gear won’t improve national security. The opportunity cost — what else could be done with that money — is the better lens. For example, critical investments in battery tech or drone industries may not count as “defense,” but could matter far more for security, Ellis said.

“If I were appointed national security advisor for a day, among my first priorities would be to massively fund university research into alternative battery and magnet technologies that do not rely on rare-earth metals for which single countries dominate supply, as well as research into cleaner processing of those minerals. That would not even count as defense spending,” Ellis said. “My other initial priority – fostering a domestic drone industry, including design, manufacturing and operation – would probably also not count as defense spending.”

Increased military spending need not translate one-for-one into higher military spending, let alone larger deficits as governments will try to find savings and trade-offs elsewhere, she said. But to the extent that it does boost government borrowing, this has implications for bond markets, for the global level of yields and for the size and shape of private investment.

Source: Bloomberg Europe