CAMBRIDGE – The Communist Party of China’s 20th National Congress, which gave President Xi Jinping an unprecedented third term as general secretary, also featured a leadership shake-up that replaced market-oriented technocrats with Xi loyalists, raising questions about China’s plans for its faltering economy. Excessive state control, after all, is a tried-and-true recipe for becoming mired in the middle-income trap that Chinese leaders have long vowed to avoid.

The breakneck pace of state-guided investment in real estate and infrastructure – China’s go-to stimulus strategy – has generated diminishing returns, with slowing economic growth implying an inevitable fall in housing and office prices. This is especially true in the smaller, poorer, and less-developed cities that collectively account for more than 60 per cent of China’s gross domestic product (GDP). Housing prices in so-called third- and fourth-tier Chinese cities have fallen by roughly 15 per cent to 20 per cent over the past two years. Some form of sustained financial stasis will most likely ensue. But even if it does not look quite like a Western-style banking crisis, the concomitant fall in lending will still inhibit growth.