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More Semiconductors, Less Housing: China’s New Economic Plan

China’s political leaders, under pressure to support the country’s fragile recovery, are slowly steering the economy on a new course. No longer able to rely on real estate and local debt to drive growth, they are instead investing more heavily in manufacturing and increasing borrowing by the central government.

For the first time since 2005, when comparable record keeping in China began, banks controlled by the state have started a sustained reduction in real estate lending, data released last week showed. Enormous sums are instead being channeled to manufacturers, particularly in fast-growing industries like electric cars and semiconductors.

There are risks to the approach. China has a chronic oversupply of factories, well more than it needs for its domestic market. A greater emphasis on manufacturing will probably lead to more exports, an increase that could antagonize China’s trading partners. China’s extra lending also poses a challenge for the West, which is trying to foster extra investment in some of the same industries through legislation like the Biden administration’s Inflation Reduction Act.

The shift to manufacturing loans underlines Beijing’s reluctance to bail out China’s debt-burdened property market. Construction and housing account for about a quarter of the economy and are now suffering from steep declines in prices, sales and investment.

China’s investment push might stir more growth in the coming months, partly offsetting troubles in the housing sector. But more central government borrowing, as a replacement for local borrowing, will do little to defuse the long-term drag on growth caused by accumulating debt.

“I don’t think there is a problem for short-term development, but we have to be concerned about medium and long-term development,” Ding Shuang, the chief economist for China at Standard Chartered, said at a recent forum of Chinese economists and finance experts in Guangzhou. “It’s fair to say real estate is not at a floor.”

China’s housing crisis has its roots in four decades of debt-fueled speculation that drove prices to levels far above what could normally be justified by rents or household incomes. China’s policymakers triggered the sector’s recent decline by starting to rein in lending several years ago, and now are reluctant to rescue the sector by kicking off another binge of housing loans.

The government believed that China’s economy would snap back in 2023 after the country’s leaders lifted most “zero Covid” restrictions that quashed the economy last year. But after an initial burst of activity, growth lagged in the spring and summer. Vulnerabilities remain: Manufacturing activity stumbled again last month, after showing growth in August and September.

“Today we have comparable difficulties as 1978, so the question now is what will be the future of innovation-driven growth?” said Zhang Yansheng, a former senior official in the central government’s economic planning agency who is now at the China Center for International Economic Exchanges.

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