Despite targeted stimulus measures to boost exports and domestic consumption, growth has not yet returned to pre-pandemic levels. Beijing is already forecast to miss its 5% growth target for this year.
To make matters worse, the country's real estate crisis — which first unfolded two years ago — has become a slow-motion car wreck.
On Thursday, shares in China Evergrande, the country's second-largest property developer, were suspended as the firm teeters on the edge of bankruptcy. A day earlier, news agency Bloomberg reported that the company's CEO, Hui Ka Yan, also known as Xu Jiayin, is being held by police under "residential surveillance."
Evergrande's shares only resumed trading in Hong Kong in September following a seven-month halt when the firm failed to publish its financial results. The company is estimated to have at least $328 billion (€310 billion) in debt.
Rising towers, skyrocketing prices
A major engine of economic growth, China's real estate sector is responsible for about a third of the country's gross domestic product. After a decadeslong construction boom, Chinese President Xi Jinping introduced tight curbs on the debt levels of property developers in 2020.
The plan was to try to cool the real estate market somewhat and lessen the systemic risk to the entire financial system from the huge debt pile. But the measure was so severe, it has been labeled an act of economic self-harm.
"The private sector residential construction downturn has become increasingly protracted," Rajiv Biswas, Asia-Pacific chief economist at S&P Global Market Intelligence, told DW. "Chinese property buyers have become increasingly concerned about the widening debt problems and construction delays."
Ordinary Chinese people, who for years believed that property was a safer bet than the country's volatile stock market, have become increasingly scared of losing down payments on new properties that may never be built.
Evergrande has survived — until now
Evergrande, which used deposits from buyers of future apartments to fund its current property construction, was the first to experience a liquidity crisis months after Beijing's crackdown.
Several other homebuilders have since gone to the wall, and this summer the largest developer,Country Garden, narrowly avoided default after announcing a record loss and debts of more than $150 billion.
Despite this, China's leaders have been accused of doing too little to shore up the property sector and relieve the burden on individual investors. These individuals have been hurting the most from the crash, and have occasionally vented their anger in the streets.
Debt restructuring plan for Evergrande falls apart
A $35-billion restructuring plan for Evergrande, agreed in April, is now thought to be in doubt.
"One still has to find a way to cover losses, so that’s why things are moving slower than what might be ideal," Antonio Fatas, an economics professor, at INSEAD Business School in Singapore, told DW.
"You are now seeing the political struggle to allocate blame for this," he added, referring to the reported arrest of Evergrande's CEO, who the company said later Thursday was being held on suspicion of "illegal crimes."
The more time Beijing takes before intervening, the greater the risk the crisis spread to other sectors, said Moody's Analytics assistant director-economist Heron Lim.
Possible 'crisis of confidence'
"If Evergrande is the tip of the iceberg and contagion risks materialize, a crisis of confidence in the onshore debt markets that have thus far avoided many of the defaults could erupt and lead to a severe downturn," Lim told AFP news agency.
One benefit, however, from China being a country of savers is that the real estate crisis doesn't pose as much risk to the entire financial system as similar crises in the West, including the 2008/09 financial crisis.
However, as new projects continue to dry up, small businesses and workers are finding themselves owed hundreds of millions of dollars. The shadow banking system — a network of trusts outside of the main banking system — is also nursing huge losses.
Chinese economy faces tough choices, slower growth
Over the medium term, China's leaders will need to learn hard lessons from the real estate boom, which enriched hundreds of millions of people but was allowed to grow out of control for years, said Fatas.
"China needs to pivot from the excessive reliance on real estate investment and that is proving to be much harder than what the government assumed," he told DW.
Seventy percent of household wealth is currently tied up in the ailing property market. Without being able to count on the huge growth in property purchases and prices, Beijing will clearly struggle to maintain the levels of economic growth seen in the last decade, which were often in double digits.
But even if the worst-case scenario doesn't happen, China's post-COVID rebound looks certain to stay weak, Biswas told DW.
"The near-term outlook for the residential construction sector remains challenging and could continue to be a drag on economic growth in 2024," he warned.
Biswas noted how China's residential property market also faces "structural headwinds" going forward due to the projected decline in the country's population over the next two decades. "That phenomenon will likely weigh on demand for new properties," he added.
Edited by: Uwe Hessler