Is China’s economy struggling following a real estate downturn? What impact could China slowdown have on Scotland?

China’s economy has been partly driven by a property boom, but that bubble appears to have burst

Work at a construction site on the outskirts of Tianjin, China, has come to a halt. In a scene replicated around the country, part-finished high rise residential blocks are abandoned.

Owned by Country Garden, one of the country’s largest property firms, workers recently told local media they had not been paid in months.

One man, who is living in a dormitory on the site, having been brought in to work on the project from another region of China in May, said he had received basic living expenses, but had not been given a proper wage since he arrived. "So far, none of the parties involved is taking responsibility," he said.

A residential complex built by Chinese property developer Country Garden is seen in Nanjing, in China's eastern Jiangsu province.

Country Garden, which is believed to have around one million uncompleted properties in its portfolio, according to estimates from Nomura, this week reported a record $6.7 billion [£5.2bn] loss for the first six months of the year and warned it could default on its debts. Meanwhile, China Evergrande, another major property developer, recently filed for bankruptcy in the US amid a debt restructuring after defaulting on $300bn [£237bn] of debt in 2021.

The pair are among the biggest players in the bursting of a property bubble that has left many Chinese developers in financial trouble.

The country had relied on a real estate boom, fuelled by a growing population, which saw top tier cities such as Beijing and Shanghai become among the most expensive places to live in the world.

Now, particularly in smaller cities such as Tianjin, on the north coast, real estate development is struggling. Some of the many apartments built by developers such as Country Garden were once snapped up by buyers from wealthier cities as investments rather than residential homes. Now, demand has fallen sharply.

British Foreign Secretary James Cleverly, left, and Chinese Vice President Han Zheng attend a meeting at the Great Hall of the People in Beijing, China, this week.

“Property prices are falling,” says Sai Ding, professor in economics at the Adam Smith Business School at the University of Glasgow. “In my opinion, this is some kind of a correction to the previous bubble. This long property boom has now come to a stop and certainly this affects the economic future for China. Things are not looking very promising.”

China’s previously booming economy is showing signs of slowing down. Stringent restrictions aimed at a zero Covid strategy, which only lifted at the end of last year, have hit the private sector. Meanwhile, geopolitical changes have seen some of China’s international business come to a halt, particularly in the tech sector where some Western governments have cited security concerns.

China’s economy rose by just 0.8 per cent in the second quarter of the year compared to the first quarter, according to recent figures. Exports have plummeted – dropping by 14 per cent in July – while consumer prices fell for the first time in two years.

Economists have downgraded their forecasts for China’s economic growth, some to below the government’s target of around 5 per cent. On Thursday, official data showed activity in China's factories shrank for a fifth month in a row.

An anticipated stimulus package from the Chinese government has not materialised. However, Richard Baker, head of China for trade for investment agency Scottish Development International (SDI), said he believed China’s real estate sector was, like Scotland’s banking sector during the financial crash of 2007, too big to fail.

“We’re definitely seeing the property market cooling off,” he said. “But I'm split between pessimism and optimism for China’s future. But on property, it is too important and too big for the government to let it go wrong.”

Mr Baker insisted Scottish exports had not seen signs of a decline in demand in China.

“The chat is positive,” he said. “We’re not seeing too much evidence of economic downturn, or consumers shying away from buying the things that we’ve got to sell from Scotland. We’re seeing good, steady trade.”

He said he believed the market for Scottish salmon in the country was only likely to increase, after China banned imports of seafood from Japan following Tokyo’s release of radioactive water from the Fukushima power station into its seas.

“That could be quite good for us, as long as we can get the supply in,” he said. “We do have some [Scottish] companies which are a bit uncertain about how they are allowed to deal with China and, in that sense, the Whitehall messaging is a bit unhelpful.”

Prof Ding said he believed China needed a boost to its private sector. A lack of jobs in private firms has seen university students return to further study rather than entering the labour market.

She said: “After China abolished its zero Covid policy at the end of last year, the economic rebound has not happened yet as previously predicted. In the past, the Chinese economy relied on the private sector so much, but after Covid, the really stringent restrictions hurt the private sector.

"The private investment and economic activity remained quite weak and entrepreneurs were reluctant to invest. This is a clear sign of weak business confidence.”

A deteriorating relationship between Beijing and Western governments has had an impact on Chinese overseas business.

Two years ago, the Chinese company Huawei was banned from UK's 5G infrastructure citing security concerns, while this month US president Joe Biden signed an executive order banning high-tech investments in China that could enhance China’s military capabilities. However, there appears to be signs of a thaw in relations.

This week, foreign secretary James Cleverly visited Beijing and held meetings with senior members of the Chinese government – the first meeting of its kind in five years. A Scottish minister is also due to make a trip to Beijing before the end of the year.

"I think this is definitely a positive development,” said Prof Ding. “China plays a key role in the global economy, so it [better relations] has a huge benefit to not only the Chinese economy, but the world.

"I don't think [China] can go back to the previous growth anymore, but hopefully it can grow.”