China’s economic performance has been extremely disappointing since the lifting of lockdowns late last year, and economic data has repeatedly missed forecasts. The government’s 5% GDP growth target is now being met with scepticism, and fears of a deflation trap have engulfed investor sentiment. At the heart of China’s economic troubles lies the property sector, and until policymakers proactively and sufficiently target rejuvenating it, prospects for China likely remain dim.

Much of China’s recent financial stress and deepening economic weakness can be traced back to the malfunctioning property sector—a problem that risks dragging the whole economy into a prolonged and damaging downturn. Specifically, there are four channels through which property impacts the overall economic and financial health of China:

GDP growth: The property and construction sector’s sizeable exposure to the overall property market implies that the government’s 5% GDP target will be hard to meet if the property sector doesn’t start to recover.

Households: The property sector has an outsized wealth effect compared to other investments in China. Given the sector’s struggles, shrinking wealth is deterring consumers’ willingness to spend.

Local government: Falling land sales are decimating local government’s budgets, fuelling fears about local government funding vehicle (LGFV) debts.

Financial system: Some trust products provide shadow bank financing to developers that help protect them against default risks.(1) Further strains to the financial system would certainly serve to dampen market sentiment at a time when investors are already nervous.

The property sector's issues are significantly impacting China's outlook and causing concern for global investors. Without adequate action from policymakers to address market weakness, investor enthusiasm for investment in China will likely be subdued. However, history has taught that China frequently makes policy adjustments during the bleakest times—an environment that can create investment opportunities for active investors.

For a deeper dive into the causes of China’s property sector slump and the investment implications moving forward, read China’s property slump takes centre stage.

(1) Trust products are a wealth management product launched by trust companies which are often linked to shadow banking and attract high net worth investors through high potential returns.