China’s Bigger Pie

It’s that time of year again. Chinese GDP figures are broadcast to the world by the National Bureau of Statistics and onlookers from all over await in suspense.

Recently released Q2 2019 stats have revealed a GDP growth rate of 6.2% y-o-y, a 27-year low. News headlines teasing at the idea of a Chinese recession are ready to poke at our inner alarmist. If we free ourselves from the obsession with numbers, though, what we’ll see is not a bubble bursting, but an economy transitioning into stability.

To the untrained eye, the latest data might tell the tale of an economy teetering on the brink of a downturn. While GDP growth has not been this low since 1992, if we look at GDP per capita, a better indicator of quality of life and purchasing power, a different story unfolds. Between 1992 and 2018, Chinese GDP per capita rose from approximately $1,228 USD to about $19,000 USD*.  Far from dwindling, we can see that after decades of building the base, the Chinese economy is now entering a period of sustained growth.

With respect, recent trade tensions with the U.S. have undoubtedly taken a toll on imports and exports. But, bear in mind that Q2 2019 has perhaps not yet absorbed the effect of the trade truce, which took place at the end of June. Moreover, with monetary easing, cuts to the RRR and tax reductions in the government’s artillery, the Chinese economy hasn’t gone off course in meeting the targeted full-year GDP growth rate of 6.0-6.5% y.o.y. In other words, the gentler growth doesn’t come as a nasty surprise. The pie is now bigger.

Always symptomatic of economic sentiment is investment activity in commercial real estate. In H1 2019, en-bloc commercial property investment fell 16% y-o-y to RMB 100 billion. Again, this figure doesn’t hold much promise, but could it be that purchasing power is in fact still intact and what is occurring is a shift in investor behavior? The market is now in twilight, entering into a later stage of a cycle, congruent with investors’ inclination toward safer, more stable assets.  During H1 2019, sector-wise capital flows into office assets increased 6% y-o-y and Shanghai and Beijing accounted for 71% of total investment. 

Figures coming from the retail sector reinforce the idea of a larger pie and different distribution, rather than depletion of funds. Retail sales (including online sales) rose 8.4% y-o-y this quarter and expenditure growth for education, culture and entertainment as well as medical and healthcare outpaced that of clothing. Fueling expenditure growth was the increase in disposable income levels by 6.5% y-o-y this quarter. Recent cuts to individual taxes are also expected to support consumption in coming years.

Running parallel to the trend of increased spending directed toward services is the growth of e-commerce. As online retailing begins to preside and omni-channel retail is unveiled, opportunities for placemaking have opened up a new avenue in which value is extracted in real estate. For example, aged retail spaces can be reconfigured and the tenant mix reshuffled. In H1 2019, about 600,000 sq. m of aged retail space was closed for reconfiguration and upgrade. Upon creating a community to which visitors have a desire to return, footfall can increase and space utilization optimized. The pie is bigger, and about to get better.

Behind the scenes, inbound flows from international investors is expected uphold momentum in the Chinese market for the remainder of the year. In the first half of 2019, foreign transactions accounted for 46% of commercial real estate investment. Passive local activity has opened up a less competitive orbit for overseas investors, who have been keen to fill the gap left by Chinese investors The tightening of spending by Chinese investors has also been felt nearby in Hong Kong. But, sentiment is likely to gradually improve, in tandem to cautiously optimistic trade conversations between the U.S. and China. 

Slowly but surely, the Chinese economy is becoming more about quality than it is about quantity.

By Ada Choi, Head of Occupier Research, APAC / Head of Research, Greater China, CBRE.

*Oxford Economics