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China's suffering real estate, construction sectors spark fear of economic stagnation


China's real estate and construction sectors are struggling. That's a big deal because together, those two sectors make up at least a third of all of China's economic activity. And other areas of the economy aren't growing fast enough to make up the difference. As NPR's Emily Feng reports, that is leading to fears of economic stagnation.

EMILY FENG, BYLINE: China wants its citizens to spend money, but they're not spending enough money.

NATHAN: I think the Chinese economy is totally changed, and people are spending money - habits totally changed.

FENG: That's Nathan, an upscale Beijing restaurateur. He doesn't want to give his or his restaurant's full name because he worries his business could be penalized for talking to an American news outlet.

NATHAN: I really feel that the economy is not as strong as before. People is not confident anymore. It's no money. You know, like, a real thing is that people don't have money in their hand anymore. I don't know why, but that's everybody's situation right now.

FENG: And as a result, they're not buying Nathan's wine and having fewer fancy dinners out. People did do a little revenge spending after China lifted its COVID controls at the end of last year. Domestic tourism is also up, but a good 30% of the economy is driven by construction and selling property and land. And the problem is...

ADAM WOLFE: The problem is that none of the other 70% is growing fast enough to really offset that drag.

FENG: That's Adam Wolfe, an economist with the investment research firm Absolute Strategy Research. He's explaining how an anticipated bump in consumer spending never came. And underneath all that, starting in 2021, Chinese regulators began cracking down on the debt financing model that's underpinned the property and construction sectors upon which so many other sectors are reliant.

WOLFE: And so at the heart of the problem is that that whole chain is breaking down.

FENG: A chain of other businesses that assumed that demand for new apartments would continue forever and cities would continue expanding - they're not. And that means Chinese consumers and local governments alike are buying less.

WOLFE: And on the consumption side, they're also buying less durable goods, furniture for their apartments. Real estate developers are buying less land, and the pace of construction of their projects have slowed down. And because they're buying less land, that means that China's local governments revenue has also declined. And so local governments are being forced to cut back.

FENG: New construction by floor area has dropped by as much as 45%. And there are big downstream effects. For example, construction is what's propped up China's steel industry, accounting for nearly half of global steel production.

TOMAS GUTIERREZ: It's enough to make the industry very depressed, very nervous.

FENG: That's Tomas Gutierrez, Asia editor at Kallanish Commodities, a research and information firm. He sees steel demand falling and staying that way in the long term.

GUTIERREZ: So there will have to be quite a lot of consolidation in the industry, and that's obviously going to mean forced restructuring or bankruptcies.

FENG: And there is no other market big enough to soak up China's extra production.

GUTIERREZ: There's nowhere for it to go. It's going to be quite messy unless it's supremely well managed, which nobody's ever really done before.

FENG: And so pain in one area is contributing to a vicious cycle overall - falling confidence, depressing prices and discouraging businesses from investing. Now all hopes are pinned on Chinese consumers to spend more. And China's main policymaking body just announced it's setting up a new bureau focused on supporting private businesses. Nathan, the Beijing restaurateur, says he's an optimist by nature, and he doesn't really have a choice but to keep on going. He opened a second restaurant during the pandemic, and he's trying to keep both afloat.

NATHAN: I finally, you know, I borrow money (inaudible). I mean, like, I put a, you know, almost 1 million maybe already. I can't really just leave it.

FENG: So far, his investor has been supportive, even as his first restaurant looks a little shaky. But their generosity can only last so long. He says his investor is seeing their business revenues dry up as well.

Emily Feng, NPR News, Taipei. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Emily Feng is NPR's Beijing correspondent.