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Mao Zhenhua is the founder of China Chengxin Credit Rating Group and co-director of Renmin University’s Institute of Economic Research. He is a regular commentator on China’s economy, has been a professor at the University of Hong Kong’s Business School since 2022, and was among the first to warn about the underlying pressure on China’s property prices.

The property market in China has been in crisis after a series of defaults by developer Evergrande in 2021. You first noted the potential consequences of their liquidity problems 10 years prior. How do you assess the downturn's impact on China’s economy now?

Real estate has become the most intense issue affecting China’s economy. In the past, China’s real estate was a focus of investment for all of society. Real estate prices were rising continuously, and it was commonly accepted that every adult should have his own house, which is a unique belief.

In this context, more middle-class families kept purchasing – even those not qualified to buy a house. This pushed property prices to new highs in a very short period of time around 2017, a sign a bubble was about to burst.

I noticed that Evergrande started to offer 20 per cent discounts as a selling strategy as early as 2016. It was widely believed this was an individual case limited to Evergrande, as this private developer faced liquidity issues due to excessive debt and a lack of bank support for its loans.

On the contrary, I believed the cause was something much bigger. This was a sales problem for the whole industry – prices had peaked and would start on a downward trajectory. I was the first to urge that attention be paid to the downward trend in real estate prices. I also called on our regulators to perform more stress testing, especially on the banking sector. The banking sector believed that it had sufficient collateral, such as land. But the banks did not carry out sufficient stress tests on the total debt repayment capacity of the Chinese real estate industry.

Because of insufficient stress testing, I also believed that the problems of Evergrande could soon spread to other real estate companies. Policies were only adjusted about one year later, when many real estate companies were on the verge of bankruptcy.

In 2021, I drew the conclusion that in China – like many other parts of the world – we do not need so many large real estate companies. The Chinese real estate industry was in oversupply. This has two profound implications. First, rather than recovery, the real estate sector could disappear as a ‘pillar industry’. In European countries, especially those where population growth is slowing, you don’t see a large real estate industry or large real estate companies because they already have enough inventory. Second, a downward trend of prices could lead to other big problems, such as the contraction of household balance sheets.

The Chinese government has taken several measures to stabilise the situation, including several forceful steps announced on May 17. These included cutting minimum mortgage rates and instructing localities to buy unsold flats to turn them into social housing. Do you think these responses worked?

These policies were launched relatively slowly, and after the problems had surfaced. The latest measures have boosted the volume of transactions, but have not completely reversed the decline in prices. Therefore, they have not achieved as good an effect as hoped.

My suggestion is to impose restrictions on supply, with a freeze on new construction sites and projects. This would send a clear signal to the market that supply is limited. Otherwise, you are still expanding the supply, which is problematic. Of course, the exception would be current projects already under construction, where homebuyers have already paid down payments.

Over the past few years, although real estate investment has declined, annual volume is still not small. Compared with the peak in 2019 and 2020, supply is much smaller, but if you look back, it is still a relatively large figure compared to 2015 and 2016.

We must abandon the idea that real estate construction must be the main contributor to the economy ... The era of large real estate companies is over

By the end of May, the total area of commercial housing for sale was still over 743 million square metres. That’s an increase of 15.8 per cent over the same period last year, and 5 million square metres more than 2016. I think that China’s real estate sector still has a long way to go to reduce its inventory.

The amount of land that Chinese real estate developers have acquired is astronomical. If the land sold to developers were to be developed according to their previous plans, it is doubtful that the Chinese market would have enough demand for it.

We must abandon the idea that real estate construction must be the main contributor to the economy. It will take a long time to digest the supply that has accumulated. The era of large real estate companies is over. Of course, we’ll see some upgrades in cities or renovations, but the era of large-scale construction is over.

How do you evaluate the impact of these phenomena on Chinese households? How do you view the level of consumer demand now?

The problem of Chinese household debt is very serious. In 2007, before the global financial crisis, the ratio of household debt to gross domestic product was about 18.9 per cent. By the end of last year, it had climbed to about 69 per cent.

Households used almost all of the increased debts to buy real estate. But with real estate prices going down, their debt situation has deteriorated greatly. Prices have fallen by 30 per cent or 40 per cent. This is a big problem for the middle class. It has affected consumption, and is a big constraint on the economy. Real estate asset values have gone down, but mortgage payments remain the same.

This balance sheet deterioration, and its impact on wealth, will trigger some changes psychologically. Consumers will feel that they have less money, and they will need more savings to deal with that risk. As a result, consumption will be negatively affected.

Insufficient consumption has been a long-term problem. When China’s economy grew rapidly in the past, it was not mainly dependent on the domestic market. Of course, domestic income growth also lifted economic growth, but the main driving force for growth came from globalisation and the international market. We termed it the “three-horse carriage”, with the three main engines of growth being exports, investments and consumption.

For many years, exports were the No 1 contributor to China’s economic growth. However, in 2008, we had the global financial crisis. There was shrinking demand and, subsequently, a rise in trade protectionism in many countries. We turned our focus to domestic demand.

But we soon found that difficult. Economists don’t talk about desire; they talk about affordable demand. When China’s economic growth was very fast, household income also grew, but the growth of income did not keep up with the rate of economic growth. Now, when overall growth slows down, residents’ spending power gets further constrained.

From 2000 to 2022, the average consumption rate of Chinese households was only about 38 per cent of GDP, lower than the world average of 57.6 per cent. By comparison, in the United States it was about 67.5 per cent.

The reason is that the proportion of national income distributed to residents has been low for a long time. And with asset prices falling, it has led to a balance sheet contraction for households and thus their wealth, which has aggravated the situation and caused consumption downgrades and scale-back.

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There has been a switch of focus to domestic demand to help the economic transition by reducing reliance on exports. How do you think China should promote this process?

This is a very simple question, but also a difficult one. First of all, China has a tradition of increasing savings, accumulating wealth rather than spending.

China has made great progress in recent years in the provision of basic education and medical care. But the thing is, the current economic downturn has reduced people’s incomes. There have been salary cuts, including for civil servants, teachers and employees at public institutions such as hospital staff. Lay-offs have taken place in many industries. Job creation has declined, which has also put great pressure on income expectations. More importantly, during the Covid-19 pandemic, many people did not work for several months, and this earnings gap has not been repaired.

Starting from 2020, I recommended economic stimulus in the form of consumer vouchers be given to those who had been hit hard by the pandemic. Later, I went further to say consumer vouchers or cash subsidies should be given to every resident. But there hasn’t been any meaningful action taken on this front.

Over the past two years, I have proposed to offer consumers 10 trillion yuan (US$1.4 trillion). On paper, this is a very large figure. It represents about 8 per cent of GDP, surpassing the current red line for the fiscal deficit at 3 per cent of GDP.

In fact, how big is 10 trillion yuan? It’s not a small number, but it’s not a big number either. This would translate into 7,000 yuan for each person, or about US$1,000. We know that the US gave away thousands of dollars, and Hong Kong also offered residents cash.

So how do we fund the spending? I think a fiscal deficit is one way, but there are other options. For example, there are a large number of state-owned enterprises in China, and they have 4.6 trillion yuan in profits. You can transfer that to residents through local governments, and half of the problem is solved. If 10 trillion is not possible, then 4.6 trillion is not a small amount either.

The key is, what does the government do with the money? I think the efficiency of directing funds to infrastructure spending is low, while the benefits of giving it directly to residents is high and will have a better impact for businesses. If the money goes to consumer spending and increases demand, I support it. But if money goes to government departments, which don’t use funds efficiently, I oppose it.

State-owned enterprises cannot become the main bodies of innovation. Innovation must come from large companies and privately-owned companies. For example, advanced national defence technology is built on the development of technology companies from the private sector. This is also the case in the US. If we did not have a market-oriented environment, companies like drone maker DJI would not have such status now.

What’s the outlook for start-up companies? The number of new unicorns – start-ups valued at US$1 billion or more ­– has declined in China over the past few years.

There is great pressure on China’s entrepreneurial environment. Right now, investment tends to rely on industry funds set up by the government and private investment has decreased. But there have also been some unfriendly policies towards venture capital funds. In addition, it’s difficult to exit an investment, go public or raise funds. There’s a range of constraints.

Start-ups have no choice but to compete for investments from government funds, which requires collateral and other things.

Investments by companies like Xiaomi, Tencent and Alibaba [owner of the South China Morning Post] in certain areas have promoted innovation, product development and the development of many Chinese companies. However, some are now asking whether their investment has led to “disorderly expansion”, whether they control too much. Therefore, many large private enterprises have mothballed their investment departments.

As the US-China rivalry deepens, further fragmentation of the global economy is expected. How do you view these issues, and how should China respond?

On a visit to the US in 2014, the most common question I got was about what was happening in China. To them, the country had changed from what they had known since opening up began. Then, on another visit in 2017, I found they had basically acknowledged the changes. Both [the Republicans and Democrats] had reached a consensus to contain China, and this sentiment was very hostile. In addition to traditional economic competition, there was also the emergence of ideological and value-based [competition]. Now, the US completely opposes China’s values and the choice of its national path. So it has given up its friendly policy.

I think this is irreversible. For China, it’s been very clear that it has found its own development path after going through a period when things were vague. With the rise of its economic and diplomatic powers, China has formed a totally different path from the US.

The situation between the US and China is becoming a long-term confrontation, and I think our initial assessment of the trade war back in 2018 was not enough. The US wages trade wars with almost everyone, including allies like Canada, the EU or South Korea, but what’s critical is we need to distinguish trade wars with its allies and with China. They are different; the so-called trade wars with allies are an adjustment of trade relations, while the US’s trade war with China is an all-around competition.

I think that the trade war is heading towards a new cold war, and decoupling is the midway between the two. Both sides believe that their values are irreconcilable. This kind of competition must have a result in the end. There must be a winner and a loser.

In the past year or so, the West has expressed increasing concern related to what it terms China’s overcapacity. Do you agree with that view?

What I have seen is the US attempting to weaken China’s supply chain capabilities in the name of changing the trade imbalance between the two countries.

First of all, the trade imbalance is caused by different industrial structures. In other words, if the US doesn’t buy goods from China, they have to buy from somewhere else at higher prices. Therefore the “reshoring” or “supply chain diversification” initiatives, in my view, are meant to weaken China, not necessarily strengthen the US. The ultimate purpose is reshuffling the world’s supply chain landscape by utilising its superior technologies.

Secondly, I believe the US and its allies are trying to curb the development of industries where China has a competitive edge, which happens to be China’s “new three”: photovoltaics, lithium-ion batteries and new energy vehicles. Overcapacity concerns have been raised around these industries.

I am a little disappointed that [US Treasury Secretary] Janet Yellen, as an economist, brought up this overcapacity issue, because economists know a country’s bulk exports normally exceed domestic demand. For example, crude oil from the Middle East is a form of overproduction, right? There is also overcapacity in Australia’s agricultural products, and also in food production in the US. An exporting country must have overcapacity domestically.

China has gone through several rounds of overcapacity, so this is a common occurrence. We must, of course, see to some of our own problems. During the economic downturn, our demand shrank faster than supply. Supply-side structural reforms, including the high-quality development and other efforts, mean China’s supply has recovered faster than demand. Investment opportunities decreased, so if an opportunity came up, everyone jumped on it. That’s why new energy became an overinvested area in China.

China needs to take more resolute measures to digest its own production capacity domestically, because with the pressure from the US we may face some obstacles in trade. China should further enhance its competitive edge in critical emerging industries. For example, if technological stability could be achieved in new energy, with current cost advantages it can greatly reduce reliance on traditional sources like fossil fuels, which could also change the global landscape.

As a recently appointed professor at the University of Hong Kong, how do you view the city’s role as China enters an economic transition?

From Asia’s financial centre to a superconnector linking mainland China to the world, Hong Kong’s role has changed. And now, I think the future of Hong Kong is gradually becoming clear.

My own judgment is, in the context of China-US rivalry, it is actually impossible for Hong Kong to maintain its status as purely an international financial centre. When I compare Singapore with Hong Kong, I think a major difference is that Hong Kong has been able to provide financial services for mainland companies going into international markets. Singapore cannot play this kind of role in Southeast Asia, because it does not have the economic relationship with these countries that Hong Kong has with the mainland.

The problem now is that as trade and investment between the mainland and US has decreased, Hong Kong has lost an important source of business, and the mainland’s economy is in transition. All these are headwinds for Hong Kong.

But these have not brought any fundamental change to the city’s economic structure or its common law system. Hong Kong is still China’s most international city. In areas such as certification, testing and international arbitration, Hong Kong still has a lot of advantages that make it irreplaceable by other Chinese cities.

Education is the area that Hong Kong can develop outside its traditional industries. The standard of English in Hong Kong is the highest in the country, and it can offer training in common law. There are five Hong Kong universities on the world’s top 100 list. In fact, the income from the expansion of postgraduate students in Hong Kong in the past two years is also considerable. The tuition fee for a student is roughly US$50,000 a year. Their local spending can also boost consumption.

Hong Kong should also recruit students from other countries, including developed countries and countries in the Belt and Road Initiative.

Given the current status of China-US relations, Chinese scientists and hi-tech practitioners in the West may have the desire to leave – but they are concerned about moving to the mainland. These concerns include their children’s education, international communication and the security of their wealth. They’ll be concerned about their investments as well. They may prefer Hong Kong. Besides attracting these skilled personnel to universities, you’ll need large tech companies, from China and the rest of the world.

Chinese technology companies need to attract international talent, but many potential staff members might be unwilling to migrate. Hong Kong’s tax rate is low, which along with a strong legal system and a high level of internationalisation can meet their needs.

With the Greater Bay Area [regional integration] proposal, Hong Kong and Shenzhen could complement each other in technology development, so there’s potential for Hong Kong to build a tech industry. Where the two are connected, there’s plenty of land that could cost less than it would in Shenzhen. It could be at the forefront of China’s technology development, and play a global leading role.

Hong Kong is now in transition, albeit passively. One of the short-term problems it encounters is its reliance on finance. In the future, China may have better relations with the West. And Hong Kong will continue to be an international financial centre and will be able to establish itself as a tech hub.

On July 18, China concluded its third plenum – a major meeting of the Communist Party’s Central Committee held about once every five years, which charts the direction of the country’s economic policies. What are your thoughts on the meeting and its results?

First, we need to understand the context of the meeting. The third plenum this year is a central meeting in President Xi Jinping’s third term, not an occasion for a new leader to announce a groundbreaking vision.

Therefore, the central government would not make an unexpected policy pivot, nor would it hold back on a big move until the third plenum. This was my judgment before the meeting, and the results confirmed this.

Second, I’d like to point out the decision document released after the third plenum confirmed that China adheres to a socialist market system and equally protects different forms of ownership in the economy. This has answered many people’s questions, and had a positive impact. At the same time, it also clearly outlined priorities for national security, ideology and the state-owned economy. This can provide a framework for future development.

Third, it has provided guidance for reform in some important areas of China’s economy, such as the reform of the fiscal and taxation systems. There are new ideas in its stance on the relationship between central and local governments – appropriately expanding rights for local governments [in tax collection] and increasing some taxes such as the consumption tax.

Another important message is to vigorously develop science and technology, and emphasise the importance of building a unified national market. In short, I think the third plenum is of great significance in stabilising expectations.