Is China's High Investment-Led Growth Model Sustainable?

China's property market, which constitutes 30% of its GDP, is facing significant challenges with major firms like Evergrande defaulting, leading to widespread economic concerns.

These figures – or their absence – reveal more than an economy struggling to grow after Covid. What they demonstrate is that China’s high growth model over the past few decades has run out of steam. The sector is hugely important to the Chinese economy and makes up around 30 percent of its GDP. In 2020, the Chinese government attempted to deflate the bubble with its Three Red Lines policy, which tried to regulate the amount of debt developers could take on.

Many analysts have pointed to the similarities between the current situation in China and what happened in Japan in the 1990s. In Japan, a debt-fuelled property bubble imploded, leaving the country with two decades of lost growth as consumers and corporates sought to deleverage. Julian Evans-Pritchard, head of China Economics at Capital Economics, agreed. “Policymakers appear concerned that their traditional policy playbook would lead to a further rise in debt levels that would come back to bite them in the future”.Leaving aside issues in the real estate sector, the Chinese economy faces a set of structural issues that are holding back growth.

“It is the wish of the Chinese government to shift from old style, industrial production and fixed investment to consumption,” Mui said.

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