China’s economy faces a series of challenges to improving it’s slowing economy. Starting with the growing real estate bubble, China has seen a 4.5% decline in housing prices for the first time in 20 years and now boasts
roughly 60 million vacant apartments awaiting buyers. Since real estate accounts for between 25% and 30% of overall GDP, if the real estate bubble were to burst, it would have a crippling effect on future GDP growth. In addition, it would undoubtedly drive overleveraged real estate developers out of business, resulting in unemployment across multiple socioeconomic strata.
The manufacturing sector of the economy is likewise in trouble. In comparison to the US (operating at a healthy 80% manufacturing capacity), China is operating at 70% of its total capacity at a time when it is unlikely that demand for goods will increase to absorb the excess. One major contributor to this problem is so called “Zombie Firms” that earn negative cash flows but are still propped up by the State.
China’s housing sector seems to be the biggest obstacle for continued growth. It is clear that prices must continue to fall in order for the market to become healthy again. To keep the real estate bubble from growing, one solution is the Central Bank of China increasing interest rates, thus curbing investment. For the manufacturing sector, one potential solution is the State shutting down these inefficient firms. However, both of these things would likely cause unemployment and plunge the economy into recession, which seems like the last thing Chinese leaders want.