China is spending again. Its property market isn't

China's economy grew at a respectable 4.5 per cent annual pace in the first quarter, lifted by a sharp rebound in retail spending, restaurants and domestic travel after the end of zero-Covid. Economists took it as proof that Beijing's recovery was on track. Look under the bonnet, however, and the engine is running on only some of its cylinders. Consumers are eating out and buying domestic plane tickets with gusto, while property, long the main driver of Chinese growth, remains frozen.

In past cycles Beijing revived growth by opening the state credit taps to property developers and local government financing vehicles (LGFVs). Land sales took off, and steel and concrete demand followed.

A reopening, not a boom

The figures released on Tuesday show where the strength lies. Retail sales rose 10.6 per cent in March from a year earlier, flattered by comparison with last spring, when Shanghai and other cities were locked down. Catering and travel led the way as households made up for three years of restrictions. The government's growth target for this year, set at the National People's Congress in March, is around 5 per cent, and the first quarter puts that within reach.

The rebound owes more to the lifting of controls than to any new policy. Beijing abandoned zero-Covid abruptly in December, and after a painful wave of infections over the winter people returned to shops, restaurants and trains. That is a one-off release of pent-up demand. Sustaining it will require incomes and confidence to keep rising, and the labour market is uneven, with unemployment among urban sixteen-to-twenty-four-year-olds close to 20 per cent in March. Households have also been saving heavily since the pandemic, and many are using spare cash to pay down mortgages early rather than to spend or invest.

No credit boom this time

That debt-fuelled model has broken down. Despite targeted easing, new property starts are still falling at double-digit rates. Private developers remain shut out of offshore bond markets and are struggling to finish homes they have already sold.

Households that watched giants such as Evergrande go bust, and saw their own property wealth shrink, are refusing to put their savings into real estate. The burst of credit that used to power global commodity cycles is missing from this recovery.

How property broke

The freeze was policy-made. In August 2020 regulators introduced limits on developers' borrowing known as the three red lines, aimed at forcing the most indebted firms to cut their leverage. Credit to the sector dried up, Evergrande defaulted on its offshore debt at the end of 2021, and dozens of other developers followed. Because most Chinese homes are sold before they are built, the defaults left buyers paying mortgages on flats that were not being finished, and last summer some of them refused to keep paying.

Beijing has since reversed course, at least on paper. In November regulators announced a package of measures to ease credit to developers, and the central bank has cut banks' reserve requirements, most recently in March. Lending to companies has been strong this year, much of it steered toward infrastructure and manufacturing. Household borrowing, which is mostly mortgages, has stayed weak, and that is the part that used to drive the commodity cycle.

Haircuts don't travel

That changes how China's reopening reaches the rest of the world. A recovery built on haircuts, restaurant meals and high-speed rail trips does not suck in foreign machinery or German cars, still less Australian iron ore and coal.

It stays inside China's service sector and does little for anyone else. Spending on services also has a far lower import content than construction, which relies on imported iron ore, copper and machinery.

The contrast with earlier stimulus is sharp. After the 2008 financial crisis Beijing launched a package worth 4 trillion yuan, much of it spent on railways, roads and housing, and the resulting demand for steel, copper and coal lifted commodity prices and the economies of exporters from Australia to Brazil. A smaller repeat in 2015 and 2016, driven partly by a programme to redevelop old urban housing, had a similar effect. Both rounds of stimulus ran through construction, and construction is precisely what is missing now.

Who gains, who waits

The beneficiaries are mostly domestic. Restaurants, airlines, hotels and cinemas in China have recovered fastest, along with the casinos of Macau. Some foreign consumer firms have gained too, notably European luxury brands whose Chinese customers are shopping again. The losers are the suppliers of heavy industry, from iron ore miners to German makers of machine tools, who were counting on a revival of Chinese construction to offset weak demand elsewhere.

The effect on inflation elsewhere is mixed. A consumption-led recovery does less to push up global commodity prices than a building boom would, which is good news for central banks in America and Europe. It also means that China will not act as the engine for global manufacturing that it did after 2009, leaving the world's factories more dependent on Western consumers who are being squeezed by higher interest rates.

What could change the picture

The counter-argument is that property may be closer to the bottom than it looks. Sales at some developers have picked up since the start of the year, and new home prices in the larger cities have begun to edge up again. If buyers regain confidence that flats will be finished, the backlog of demand could feed into new construction later in the year, and commodity exporters would benefit after all. A decisive move by Beijing to fund the completion of unfinished homes would be the clearest sign that the property drag is lifting.

The signals to watch are monthly property sales and new starts, credit data showing whether households start borrowing again, and the Politburo's regular economic meeting in late April, which often sets the tone of policy for the rest of the year. China's reopening has produced a consumer bounce, but without a property-led credit boom it will do little to help the rest of the world. Global manufacturers hoping for rescue from Beijing are likely to be disappointed this year.