The hidden drag on China’s economy

This report is from this week’s CNBC’s The China Connection newsletter, which brings you insights and analysis on what’s driving the world’s second-largest economy. Each week, we’ll explore the biggest business stories in China, give a lowdown on market moves and help you set up for the week ahead. Like what you see? You can subscribe here.

Falling real estate prices are the elephant in the room when it comes to China’s economy.

From June 2023 to June 2025, the average price per square meter for secondhand apartments in 100 major cities fell by 13%, according to CNBC’s calculations of data published last week by China Index Academy, a research firm. Beijing and Shanghai saw similar double-digit price drops.

It’s a bitter pill to swallow for homeowners hoping to reap a profit. The past decades of skyrocketing property prices saw many in China splurge on new properties before they were even built or completed, which fueled a speculative bubble — followed by the high-profile defaults of Evergrande and other developers.

Now even as authorities have tried to address the financial risks, the property market is far from rebounding.

“The market is in the process of bottoming, but not yet at its bottom,” Zhu Ning, author of “China’s Guaranteed Bubble,” said Monday. He noted the real estate market has resumed its decline after some stabilization over the past several months.

Zhu expects prices to drop by another 20% to 30% over the next two to three years before the market stabilizes. In the meantime, he said, “policymakers have to be patient” and can try using zoning or other methods to generate construction demand related to public housing.

Officials from China’s housing ministry recently visited Guangdong and Zhejiang provinces to inspect the local real estate market, and called for greater stabilization efforts, state media said Friday. The report also called for the construction of safer and higher-quality homes.

Since late September, China’s top leaders have set a new tone by calling for a halt to the decline in the real estate sector.

Previously, Beijing had focused on curbing financial market risk by cracking down on developers’ high reliance on debt for growth, starting in 2020. However, coupled with the impact of the pandemic, developers have struggled to complete construction on pre-sold apartments, further eroding consumer confidence.

Several homebuyers who bought apartments from a little-known developer in Tianjin, near Beijing city, told CNBC last year they had been promised the units would be delivered in 2019. So far, there’s been no word on construction progress.

Despite the troubles plaguing China’s property market, a bright spot has emerged.

China Jinmao Holdings ramped up its land purchases for development since late 2024 and saw sales rise by 21% in the first five months of 2025 versus the year-ago period, Fitch analysts noted in a June 30 report. That contrasts with a 10.8% drop for the top 100 Chinese homebuilders, according to the report.

“Local governments are prioritizing smaller, higher-quality projects to meet upgrader demand, resulting in smaller plots and much higher unit land costs in major cities,” Fitch said, noting that governments in smaller cities have significantly reduced the supply of land to developers.

Even as the sight of many empty storefronts in Beijing reflects the overall economic slowdown, a drive across China’s sprawling capital reveals a handful of high-end residential property developments in the pipeline.

It’s a similar sight in Shanghai and Hangzhou, where Hong Kong developers Kerry Properties and Shui On Land are among those building upscale, centrally located apartments, says Qin Gang, founder of a Beijing-based consultancy that translates to Ode & Song Cultural Industry. That’s according to a CNBC translation of his Mandarin-language remarks.

He said the targeted buyer isn’t the average family, but a household with an existing home, now looking to upgrade to a unit in a better location. “Right now developers are fighting for this [kind of] customer.”

In contrast, “the people with middle income who could have bought houses, their income has now gone down, or they’ve lost their jobs,” Qin said.

The impact of the property slump has continued to weigh on consumer sentiment.

“Property is key to consumption,” Larry Hu, chief China economist at Macquarie, said in a report Friday. “Falling home prices have led to a negative wealth effect on consumption, as housing accounts for 60-70% of household wealth.”

He cautioned in a report Friday that better-than-expected 6.4% growth in May retail sales from a year ago was supported by one-off sales promotions and government subsidies.

China, in the last several weeks, also banned alcohol from government meals and released stricter rules on how much officials can spend on work-related travel — 40 yuan ($5.57) for dinner — which has encouraged a culture of frugality.

Retail sales are expected to slow to 5.6% in June from a year earlier, according to a Reuters poll. China’s National Bureau of Statistics is scheduled to release the data Tuesday.

Consumption is not the only area of impact. Real estate and related industries, such as construction, once accounted for more than a quarter of China’s economy.

“Being the largest and most important industry of China for so long, the real estate market adjustment has a long-lasting and profound impact on the Chinese economy,” Zhu said. The “real estate sector slump substantially reduces local governments’ fiscal revenues.”

That cash crunch has, in turn, pushed many local authorities to collect more taxes or find other ways to extract money from businesses.

It’s a perfect storm of events weighing on China’s economy, even without a trade war.

Treasury Secretary Scott Bessent joins ‘Squawk Box’ to discuss the current budget deficit, how strong growth can assauge deficit fears and much more.

KPMG’s Irene Chu talks about Hong Kong’s booming IPO scene, and how the city is benefitting from US-China uncertainty, as well as Beijing’s favorable regulatory environment.

Guoli Chen, professor of strategy at INSEAD, says that Beijing making AI a national strategic priority allows market forces to push the initiative and productivity to the next level, and that small and medium-sized Chinese companies have been very willing to try to capture value from AI adoption.

Starbucks China attracts bids valuing it at up to $10 billion. About 30 interested buyers have submitted non-binding offers for Starbucks’ business in China, valuing it up to $10 billion, three people familiar with the deal process told CNBC. The company is evaluating the offers, deal structure proposals and post-sale value creation pitches before shortlisting potential buyers.

Hong Kong IPO pipeline on track to surpass Wall Street this year. PwC projected up to 100 initial public offerings in Hong Kong this year, with total fundraising to exceed $25.5 billion. That would make the city the world’s largest listing destination this year, surpassing the Nasdaq and the New York Exchange.

Baidu bolsters competition in AI chatbots. Chinese tech giant Baidu has bolstered its core search platform with artificial intelligence in the biggest overhaul of the product in 10 years. Analysts told CNBC the move was a bid to keep ahead of fast-moving rivals like DeepSeek, rather than traditional search players.

China’s central bank ramps up gold purchases. The People’s Bank of China has added to its official gold reserves for eight consecutive months, with the latest official data showing an increase of 70,000 troy ounces of bullion in June.

— Anniek Bao

Stocks listed on mainland China and Hong Kong fell after Trump ruled out a deadline extension on tariffs set to kick off on Aug. 1.

Mainland China’s CSI 300 dropped 0.18%, while Hong Kong’s Hang Seng Index — which includes major Chinese companies — slipped 1.11% as of 3:50 p.m. local time. The mainland benchmark is up 1.6% for the year to date, data from LSEG showed.

— Lee Ying Shan

July 14: Trade data for June

July 15: Retail sales, industrial production and investment data for June