In our recent research paper (Rogoff and Yang 2021), my co-author Yuanchen Yang and I argue that the footprint of China’s real estate sector has become so large that absorbing a significant housing slowdown would significantly impact overall growth, even setting aside the usual (elsewhere) amplification effects from financial sector fragilities (Reinhart and Rogoff 2009). With real estate production and property services accounting for 29% of GDP – rivalling Ireland and Spain at their pre-financial crisis peaks – it is hard to see how a significant slowdown in the Chinese economy can be avoided even if banking problems were contained.
Of course, the Chinese authorities exert enormous leverage over the housing market, and have in the past used an array of tools to alternately tighten and stimulate the market. But the issue is not just maintaining stability but also maintaining the scale of production and employment. The fact that the square feet of housing per capita in China already rivals that of much richer economies such as Germany and France (see Figure 1) is sobering. Even acknowledging that the average construction quality in China is lower so that there is room to upgrade, this suggests that the current size of the real estate sector, relative to GDP, cannot easily be maintained.
Figure 1 Average residential space per person by country in 2017 (sq.ft.)
Source: Rogoff and Yang (2021).
Up until now, China seems to have brushed aside growth and real estate concerns. With its …….