Since the first half of this year, with the deepening of regional integration and urbanization entering the stage of inventory development, the degree of economic slowdown in some third and fourth tier cities in China has worsened, corresponding to the shrinkage present in the local real estate market. This high correlation between the real estate market, investments and economic growth deserves attention. This also reflects the relationship between "urbanization – capital surplus – economic and financial crisis" demonstrated by ANBOUND's Chief Researcher Mr. Chan Kung. In the long run, these elements would mainly affect and control the economy.

Take Zhenjiang, which has recently received significant attention as an example. The relationship between the downturn in real estate and the shrinking of the urban economy illustrates a problem. In 2018, Zhenjiang's GDP was RMB 405 billion, representing a year-on-year increase of -1.3%. In the first half of 2019, Zhenjiang's GDP was RMB 221.6 billion, with a year-on-year increase of 4.4%, placing it first in the Yangtze River Delta's economic growth rankings in the first half of this year. In 2018, the profit of industrial enterprises in Zhenjiang classified above the designated size was RMB 23.1 billion (designated size refers to enterprises with annual main business income equal to or exceeding RMB 20 million), with a year-on-year decline of 50.7%, and the losses of enterprises rapidly increased to 19%. In the first half of 2019, the profits of industrial enterprises classified above a designated size were RMB 9.7 billion, with a year-on-year decrease of 31.7%, and the loss of enterprises rose to 24%. In addition, fixed asset investment data also showed a significant decline. In 2018, the scale of fixed asset investment fell by 26.5%, of which industrial investment fell by 27.9%. In the first half of 2019, Zhenjiang's fixed asset investment continued to decline by 8.1%, of which industrial investment dropped by 11.9%. At the same time, Zhenjiang's fiscal revenue also experienced a sharp decline and a deficit. Some analysts believe that the dilemma of Zhenjiang's economy has a lot to do with the bubble experienced by the local real estate market. In 2016, the average residential price in the downtown area of Zhenjiang was maintained at around 7,000, reaching a historical peak by the end of 2018. Meanwhile, the average price in the central city was over 10,000. In 2019, the Zhenjiang market has reached the limit that its urban economy is able to withstand. Since then, it has lost its growth, and has begun to enter a period of continuous decline. Real estate transactions have also begun to experience contractions. By now, the average price of its downtown area is barely sustained at around 9,500. In addition, the situation in Zhongshan is also similar to that in Zhenjiang. As the cost of housing prices increase, and once a certain threshold is reached, the next effect would be the downturn in the overall urban economy.

ANBOUND believes that real estate development has two pillars, one of which is capital and the other is economic prosperity. Among these two, capital refers to direct supports to the real estate market, real estate credit, development credit, buyers and sellers and other similar types of capital support. On the other hand, economic prosperity means that the economic environment must be able to continuously absorb capital. When there is a large amount of investment, the most common effect that is visible is GDP growth. For instance, high investment growth played a crucial role in the GDP growth of China. With investments coming in, the market optimists need not worry, as the natural real estate market will heat up again. The example of Zhenjiang just proves that once the two pillars are not managed well, the impact on real estate will be huge.

Understanding these two core issues will help in producing effective measure to determine the appropriate size of the city's real estate market. This is because both the indicators of investment growth and the indicators of GDP are relatively transparent. In this way, it is easier to measure the size and potential of a city's real estate market with a credible database. Therefore, in the development of a regional economy, the local government must consider the tolerance and support of regional economics and real estate development. Currently, when urbanization enters the inventory development stage, i.e. reinvention or renewal of existing cities rather than building new cities, many regions have not continued to promote the potential and space of real estate construction on a large scale. Hence, ensuring that the speed of real estate development corresponds to that of economic growth would be a real issue that arises when local governments are striving for economic stability and development.

In the trend of regional economic development integration, future competition for population will be mostly about attracting people from the third- and fourth-tier cities. There will be a strong population inflow, especially in the defined second-tier cities. The real estate bubble in the third- and fourth-tier cities, and to a larger extent in the counties has the greatest risk after the exit of the shed reform policy. The economic presence of these regions falls under a matter of inventory development and they might even experience the problem of reduced development. Due to the outflow in the population, the previously inflated real estate bubble has reached an unprecedented level, and it has brought along with it, unprecedented challenges to the local economy. ANBOUND's research time has always advocated for the second part of China's urbanization, urban renewal should replace the previous urban incremental expansion model. At the same time, it should focus on the cultivation and development of the consumer economy and resolve the problem according to the inventory development. This is a problem that needs to be considered in cities facing the real estate bubble.

Urban renewal is an important carrier for rebuilding the economic power and the urban vitality of sustainable cities. It is a key area for carrying the funds from the quantitative easing policy advocated by ANBOUND, where it is used to boost the urban economy. In ANBOUND's view, the fundamental purpose of real estate construction under the background of urban renewal is not to solve local fiscal problems, but to create an endogenous driving force of urban economic growth in order to achieve sustainable urban space vitality and prosperity. Establishing urban streets and businesses, building consumer market space, and improving the economic output of urban space will eventually contribute to the steady development of real estate and economic growth.

Final analysis conclusion:

Currently, the real estate market and urban economy of some third- and fourth-tier cities are evolving according to the Crisis Triangle of "urbanization-capital surplus-economic and financial crisis". Maintaining the vitality of the real estate market through urban renewal and enhancing the endogenous power of the urban economy is a long-term solution to real estate development and urban economic growth in China.