China is coming back – and the timing couldn’t be better: Stephen Jen

Stephen Jen 

April 16, 20264:16 PM PDT

Updated 36 mins ago

LONDON, April 17 (Reuters) - China has turned a corner, finally. Five years after Beijing began cracking down on its bloated property sector, its economy is now on a much more sustainable path anchored in high-quality growth – and the correction has left far fewer scars than many feared.

China’s property sector has been in a bear market since 2021, ​with average prices falling by 40% to 50%. This was partly by design. Beijing in 2020 sought to deflate a ballooning property bubble with its “three red lines” policy that clamped down on leverage in ‌the sector.

While weakness in Chinese construction and ancillary businesses may continue to drag on economic growth for the next year, it appears that the property correction is bottoming out. Shanghai’s property prices in the secondary market have begun to rise, and the pace of decline in home prices has again eased in March, with the worst contraction in prices recorded in late 2024.

Given the scale of the property market deflation, it’s remarkable that very few things broke in China. This was in contrast to the doomsday predictions that the correction would be in line with – or ​much worse than – what happened in Japan after its property market peaked in 1989.

In the case of Japan, property prices fell 80%, opens new tab from their peak. The banking sector experienced a crisis in 1997. The economy fell into a ​deflationary trap that took 25 years to arrest – and only after aggressive money printing by the Bank of Japan and massive fiscal stimulus from the Ministry of Finance.

As a ⁠result, Japan’s per capita dollar GDP has been flat since the 1990s, according to data from the IMF World Economic Outlook. On this measure, Japan fell from number three in the world in 1995 to number 32 now, behind the Czech Republic.

China ​went into its property crisis even more vulnerable than Japan – or so went the popular belief in 2021-22 – because it was not yet rich when its implosion occurred. Many feared a shock could trigger other breakages in the economy and the ​financial system.

That’s not what happened.

China managed to eke out 5% real GDP growth annually, even with a property sector in contraction.

Even more importantly, Beijing used this challenging period as an opportunity to shift its policy aim from maximising economic growth to improving the quality of its growth.

In the decade before the COVID-19 pandemic, China’s real GDP, opens new tab growth averaged around 7%, with nominal GDP growth averaging 10% to 11%. Since then, growth has decelerated by 2 to 3 percentage points.

That decline may appear worrying, but it’s actually a positive signal of a shift to a more sustainable ​growth model.

QUALITY OVER QUANTITY

China’s GDP is no longer being flattered by the housing boom but is instead being sustained by activities likely to support China’s long-term development. This includes efforts to achieve dominance in artificial intelligence, higher-technology manufacturing and alternative ​energy.

More broadly, China is making solid progress in developing a self-sustaining industrial ecosystem. This is largely thanks to its “Made in China 2025” plan, which has helped it move up the value chain.

China's supply chain self-sufficiency

China – which boasts both heft and speed – is now able to compete head-to-head ‌with rivals from Europe ⁠and the U.S. on high-value goods, like electric vehicles and robotics.

That’s largely thanks to two key strategies.

First, China has adopted a warp-speed imitation/innovation strategy. Leveraging its army of engineers and graduates in science, technology, engineering, and mathematics (STEM), it imitates whenever possible and innovates when necessary.

And it does so very fast. For example, the product cycle of Chinese automakers is about twice as fast as that of their European counterparts. For new models, it takes 1.5 to three years for Chinese manufacturers, opens new tab, compared with four to six years for European rivals.

Next is China’s 80:20 strategy, achieving 80% of the cutting-edge technology at 20% of the cost. This has enabled China to climb up the value-added ladder and remain price competitive internationally.

Just look at DeepSeek. The release of the AI large language model (LLM) in January 2025 ​was such a shock, not because DeepSeek achieved higher performance ​than its American counterparts, but because it managed to ⁠generate quite good performance at a fraction of the cost.

The 80:20 strategy is akin to drafting in cycling. China is comfortably tucked behind the lead rider, America. China is going almost as fast but is conserving its energy for later use.

GOOD TIMING

There are still causes for concern, of course.

China continues to struggle to stimulate sufficient domestic demand and cutthroat competition has shrunk profit ​margins at home.

However, the export market still typically provides Chinese producers with generous profit margins.

Carmaker BYD (002594.SZ), opens new tab, for example, makes on average $440 per vehicle sold in China. Its profit margin ​per vehicle outside China, however, jumps ⁠to $3,000 per vehicle, according to China's biggest brokerage CITIC Securities.

Trade tensions with the U.S. are another sore point, as they have limited China’s access to the world’s largest export market. However, China has significantly increased exports to the rest of the world, most notably Asia, Europe and emerging markets.

And the rivalry with the U.S. is not all bad. It may continue to propel China’s technological advancements and broad adoption of new technologies, and it has allowed Chinese exports to compete in a wider range of value-added categories in new markets.

Moreover, the ⁠timing of China’s ​recovery is fortuitous. Global investors, who are still heavily exposed to the U.S. on average, may be concerned about America’s unpredictable geopolitical moves and ​fiscal problems and thus be seeking to divest some U.S. assets. That capital will need a home.

(The views expressed here are those of Stephen Jen, the CEO and co-CIO of Eurizon SLJ asset management.)

Writing by Stephen Jen; Editing by Anna Szymanski and Marguerita Choy