Since the first half of this year, with the deepening of regional integration and urbanisation entering the stage of inventory development, the degree of economic slowdown in some third- and fourth-tier cities in China has worsened.
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This corresponds to the shrinkage present in the local real estate market, evolving according to the pattern of what we call the “Crisis Triangle”, namely “urbanisation-capital surplus-economic and the financial crisis”.
Take Zhenjiang, for example. The city that lies on the southern bank of the Yangtze River in eastern China’s Jiangsu province, has recently received significant attention.
In 2018, the profit of industrial enterprises in Zhenjiang classified above the designated size was 23.1 billion yuan, with a year-on-year decline of 50.7 percent. The losses of other enterprises rapidly fell to 19 percent.
In the first half of 2019, the profits of industrial enterprises classified above a designated size were 9.7 billion yuan, with a year-on-year decrease of 31.7 percent. The losses of other enterprises rose to 24 percent.
In addition, fixed asset investment data also showed a significant decline. In 2018, the scale of fixed asset investment fell by 26.5 percent, of which industrial investment fell by 27.9 percent.
In the first half of 2019, Zhenjiang’s fixed asset investment continued to decline by 8.1 percent, of which industrial investment dropped by 11.9 percent.
At the same time, Zhenjiang’s fiscal revenue also experienced a sharp decline and a deficit.
Some analysts believe that the dilemma of Zhenjiang’s economy has a lot to do with the bubble experienced by the local real estate market.
Real estate development has two pillars: capital and economic prosperity. Of these two, capital refers to direct supports to the real estate market, real estate credit, development credit, buyers and sellers and other similar types of capital support. On the other hand, economic prosperity means that the economic environment must be able to continuously absorb capital.
When there is a large amount of investment, the most common effect that is visible is growth in gross domestic product (GDP).
For instance, high investment growth played a crucial role in the GDP growth of China.
With investments coming in, the market optimists need not worry, because the natural real estate market will heat up again.
The example of Zhenjiang just proves that once the two pillars are not managed well, the impact on real estate will be huge. Understanding these two core issues will help in producing effective measures to determine the appropriate size of the city’s real estate market.
This is because both the indicators of investment growth and the indicators of GDP are relatively transparent.
In this way, it is easier to measure the size and potential of a city’s real estate market with a credible database.
Therefore, in the development of a regional economy, the local government must consider the tolerance and support of regional economics and real estate development.
Currently, when urbanisation enters the inventory development stage, many regions have not continued to promote the potential and space of real estate construction on a large scale.
Hence, ensuring that the speed of real estate development corresponds to that of economic growth would be a real issue that arises when local governments are striving for economic stability and development.
In the trend of regional economic development integration, future competition for population will be mostly about attracting people from the third- and fourth-tier cities.
There will be a strong population inflow, especially in the second-tier cities.
The economic presence of these regions falls under a matter of inventory development and they might even experience the problem of reduced development.
Because of this, the previously inflated real estate bubble has reached an unprecedented level.
During the second part of China’s urbanisation, urban renewal should replace the previous urban incremental expansion model.
At the same time, it should focus on the cultivation and development of the consumer economy and resolve the problem according to the inventory development.
This is a problem that needs to be considered in cities facing the real estate bubble.
Urban renewal is an important carrier for rebuilding the economic power and the urban vitality of sustainable cities.
The fundamental purpose of real estate construction under the background of urban renewal is not to solve local fiscal problems, but to create an endogenous driving force of urban economic growth in order to achieve sustainable urban space vitality and prosperity. Establishing urban streets and businesses, building consumer market space and improving the economic output of urban space will eventually contribute to the steady development of real estate and economic growth.
Chen Gong founded ANBOUND Think Tank in 1993 and is now ANBOUND chief researcher. Chen is one of China’s renowned experts in information analysis. Most of Chen’s outstanding academic research activities are in economic information analysis, particularly in the area of public policy