China’s high-tech investment has not yet filled the real estate gap, says report

BEIJING—China’s expansion into high-tech industries is not large enough to offset the country’s real estate slump, leaving the economy more exposed to trade tensions, U.S.-based research firm Rhodium Group said in a report on Monday.

The report says that from 2023 to 2025, new industries such as artificial intelligence, robotics and electric vehicles will increase economic output by just 0.8 percentage points, while real estate and other traditional sectors will collectively decline by 6 percentage points. The analysis drew on official Chinese data and industry-specific sources.

The findings come as China seeks to strengthen its technological independence in the face of U.S. regulations. Under a five-year development plan scheduled to begin in earnest in March, the Chinese government is doubling down on advanced technology development through state investment and favorable policies.

“China’s growth strategy is not going to work,” Logan Wright, partner at Rhodium and co-author of the report, told CNBC. “Based on the policies they have outlined so far, they are not going to achieve the GDP growth they are targeting.”

In recent years, the Chinese government has aimed for an annual GDP growth rate of approximately 5%. For China to keep up that pace, Rhodium estimates that new industries will need to expand sevenfold over the next five years to generate the roughly 2 percentage points needed for annual investment growth.

This means an additional 2.8 trillion yuan of new investment will be required this year, which is 120% more than in 2025. While investment in artificial intelligence and robotics may increase in the next year or two, it is unlikely that other emerging industries will sustain such rapid growth, analysts said.

“Electric vehicles are likely to have already reached their highest growth rates, and industry production may slow in the coming years,” Rhodium’s report said.

While the Chinese government has prioritized high-tech development, little has been done to address the country’s years-long real estate slump. The sector once accounted for more than a quarter of the economy. Sales of new homes by floor area fell last year to the lowest level since 2009, according to a report from China Real Estate Information Corporation last week.

There have been hints in recent weeks that some policymakers are considering stronger real estate support. China’s leaders are expected to formalize this year’s economic goals at their annual parliamentary meeting in March.

Macro forecasts released by global investment firm KKR estimate that the slump in real estate will reduce China’s GDP growth rate by 1.2 percentage points this year. Even with a projected contribution of 2.6 percentage points from digital technology, the estimated total growth rate remained at the lower end of the spectrum at 4.6%.

“Despite a potential 5% growth target for 2026, headwinds from real estate and a weak job market cast doubts on its achievability,” the report said. KKR predicts that real estate resistance could be halved by 2027, but sees limited improvement in the digital industry and consumer demand.

An overemphasis on technology can have broader economic consequences.

New industrial sectors may offer higher wages, but they employ far fewer workers than traditional industries, Rhodium’s analysis found.

Increased factory automation, coupled with China’s already high share of 30% of global manufacturing output, could lead to the loss of up to 100 million jobs over the next decade, a number that would exceed the total workforce of most developed countries, KKR said.

While China’s urban unemployment rate has remained above 5% for much of last year, the youth unemployment rate has nearly tripled.

The Rhodium report says that domestic investment, even in new industries, is unlikely to generate sufficient demand, so “Beijing will become increasingly reliant on gaining market share in export markets.”

“China will continue to become more dependent on exports, making its economy more vulnerable to new trade restrictions,” the report said.

Mexico and the European Union have joined the United States in raising tariffs on Chinese imports as low-cost Chinese products, including electric cars, expand overseas.

China’s economic imbalances mirror a similar disconnect in the United States, where AI companies are leading the stock market rally while other parts of the economy struggle.

But many in Beijing argue the country has long-term interests at stake.

Zhang Jianping, deputy director-general of China’s Ministry of Commerce, told CNBC last week that the country’s policies are designed to support innovation over multiple years. Traditional industries such as steel and real estate need to integrate new technologies to remain competitive, he added.