CF40 Research | Residents' Balance Sheets Have Started to Recover

Ask AI · Why did the increment in residents’ net worth pick up in 2025?

To better observe the dynamic changes in residents’ assets and liabilities statements, we provide a definition for the repair of residents’ assets and liabilities statements: Residents are able to effectively accumulate net worth. Further, we split the increment in residents’ net worth into three parts, namely: Net worth increment = current surplus + valuation change − liability increment.

We find that the peak of the increment in residents’ net worth in this round was Q2 2021, while the trough was Q3 2024, which is almost perfectly consistent with the downward phase of the manufacturing capacity cycle in this round. During this phase, the increment in residents’ net worth has been shrinking continuously, and the main reason is that real estate valuations have been falling continuously, while at the same time the current surplus has been decreasing. Therefore, describing this phase as “falling home prices continuously damage residents’ balance sheets” is both sensible and accurate.

Since Q3 2024, all three factors have shown synchronized improvement, with the increase in current surplus explaining a large portion. Real estate valuations themselves are still declining, but because the rate of home-price decline has narrowed, the resulting current losses have decreased. By comparison, the valuation of equity-type assets benefits from rising stock prices; the valuation effect has turned from negative to positive, which is a more positive change.

Based on the above analysis, we believe that the nominal growth rate in 2026 will continue to improve. The persistence of this round of economic recovery and inflation improvement may be better than market expectations. Major asset prices such as stocks, long-term interest rates, and the RMB exchange rate will face repricing. At this stage, differences and divergence within the residents’ sector are still worth paying close attention to. If, in the future, real estate valuations can stabilize, the repair of residents’ balance sheets will enter a new stage.

• The author of this article is Zhu He from the China Finance 40 Forum Research Institute. All rights to this article are reserved by the China Finance 40 Forum Research Institute. Without written permission, any form of reproduction, copying, or citation is prohibited. Due to layout constraints, references are omitted.

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In a series of studies before this, we have already conducted relatively detailed observations and assessments on issues such as the inflation trend, the manufacturing sector, and the real estate sector. One overall conclusion is: China’s current economy is in the early stage of a cyclical recovery (see CF40 Research · Briefing “China’s Macroeconomy in 2026: Recovery after Crossing the Turning Point of the Cycle”).

Specifically, we find that manufacturing capacity utilization has stabilized, the problem of supply-demand mismatch has improved, and as a result PPI has entered a phase of slow rebound (see CF40 Research · Briefing “Manufacturing Capacity Cycle Stabilization and PPI Repair Outlook”). From international comparisons and actual domestic performance, the real estate market is also approaching the tail end of this round of sustained adjustment (see CF40 Research · Briefing “China’s Real Estate Market in 2026: Moving Toward Bottoming Out and Stabilizing”). The improvement in the year-over-year growth rate of core CPI is even more notable. Even after excluding the impact of some temporary and policy-related factors (such as changes in durable goods prices brought by gold prices and the trade-in policy), the year-over-year growth rate of core CPI has also shown signs of stabilizing and even gradually improving (see CF40 Research · Briefing “2025 Inflation Review and 2026 Outlook”).

Compared with the fact that the macroeconomy has improved recently, a more important issue is the persistence of this round of macro recovery. From this perspective, whether the observed macroeconomic repair can ultimately translate into residents’ nominal income, thereby driving consumption growth and enabling the economy to enter a positive feedback stage, determines the persistence of this round of economic recovery. Both theory and reality indicate that residents’ behavior patterns are, to a large extent, influenced by the state of their balance sheets. Based on this, this article focuses on the state of residents’ balance sheets and, together with the latest changes in residents’ behavior patterns, judges the persistence of the current economic recovery.

I. How to judge whether residents’ balance sheets are being repaired?

Since 2022, one mainstream narrative around residents’ balance sheets has been: Ongoing adjustments in home prices continuously damage residents’ balance sheets, and residents therefore need to accumulate more savings and hold safer assets to repair their balance sheets; residents’ consumption and asset allocation are thus continuously and negatively affected. Under such a narrative, the stabilization and rebound of home prices seems to have become a necessary condition for the repair of residents’ balance sheets, while home prices in 2025 appear to still be adjusting downward—only with a slightly slower pace of decline than in 2024. Therefore, some views hold that residents’ balance sheets have not yet entered a repair phase.

We believe that while falling home prices do damage residents’ balance sheets, they do not necessarily mean that residents’ balance sheets are in a worsening state. This logic is similar to judging the financial performance of listed companies. Imagine a listed company whose valuation of part of its specific assets is shrinking continuously; however, as long as its cash flows are improving, or another portion of assets it holds is appreciating, what we ultimately care about is the change in net worth. As long as we can observe net worth accelerating its accumulation, we usually consider that its balance sheet is improving.

To better observe the dynamic changes in residents’ assets and liabilities statements, we first present the definition of the repair of residents’ balance sheets: Residents are able to effectively accumulate net worth.

From the definition of net worth, net worth equals assets minus liabilities, so:

Net worth increment = asset increment − liability increment

The key here is to split the asset increment into two parts. One part is the accumulation of surplus, that is, the assets formed by the money residents save in the current period. The other part is the change in market value of the existing stock assets due to valuation changes; this part mainly concentrates in two types of assets: real estate and equity-type assets. At this point, we divide the increment in residents’ net worth into three parts, namely:

Net worth increment = current surplus + valuation change − liability increment

Among them, current surplus reflects how much residents in the sector can save to form effective assets; valuation change reflects whether residents’ assets appreciate or shrink; liabilities reflect whether residents’ borrowing expands or contracts their balance sheet. Next, we will focus on how these three factors have affected residents’ process of accumulating net worth over the past three or four years.

II. Two main drivers of the repair of residents’ balance sheets: surplus repair and stock valuation improvement

All residents’ balance sheet data used in this article are estimated based on publicly available data. On the asset side, there are two categories: real estate and financial assets. Among financial assets, there are five categories: deposits, wealth management products, insurance, funds, and stocks. The calculation scope is that these are financial assets directly held by residents.

For example, for stock assets, by taking listed companies’ circulating market value for each quarter minus the portion held by institutional holders, we obtain the stock assets held by the residents’ sector. Real estate is constructed by selecting Q4 2010 as the base period, then overlaying the value of newly built residential sales each period, and calculating valuation changes using the prices at which China’s second-hand homes are listed, thereby obtaining the real estate stock value for each period. On the liability side are residents’ bank loan data (for more details, see CF40 Research · Briefing “A new framework to observe Chinese residents’ asset allocation behavior—Also discussing whether ‘deposit moving’ is real”).

Corresponding to the formula given for the first part, valuation change equals stock valuation change plus real estate valuation change. Current surplus is, in fact, data derived by backing out from asset increments; it is not estimated directly based on residents’ fund flow statements. The specific formula is:

Current surplus = new deposits + new wealth management products + new insurance + new money market funds + net stock inflow + net real estate inflow

The most directly related statistical data to current surplus is the total savings of the household sector. However, as can be seen from the formula, current surplus cannot simply be equated with total savings of the residents’ sector, because total savings is a flow concept; when mapping it to the process of asset surplus changes, it needs to be adjusted using the liability increment. For example, Resident A buys a second-hand house worth 100w from Resident B. All 100w are paid using loans. Resident B receives a 100w deposit. From the residents’ total assets and liabilities statement, the deposit asset will increase by 100w, but this increase in 100w deposits does not come from current-period savings; it comes from the increase in 100w liabilities.

We attempt to derive an indicator from the data in the assets and liabilities statement that can reflect residents’ total savings, as an indirect way to verify the reasonableness of the current surplus changes analyzed using assets and liabilities statement data. The specific approach is to use current surplus minus the liability increment.

From Figure 1, it can be seen that since 2011, the magnitudes of the two indicators are basically consistent. However, compared with the household sector’s total savings data from the fund flow statement, the total savings derived from the assets and liabilities statement exhibits clearly greater volatility. The total savings data from the fund flow statement looks more like the central tendency level of the derived residents’ total savings. One direct reason why the derived total savings has higher volatility is that the net stock inflow data fluctuates significantly, which is an important aspect we need to pay attention to, while the fund flow statement seems insufficient in reflecting this.

After validating the reasonableness of the data, we first look at the overall change in net worth increment. To more intuitively show the impact of liability increment on net worth increment (an increase in liabilities corresponds to a decrease in net worth), we set liability increment as a negative value. For example, in Q1 2019, residents’ liabilities increased by 1.81T yuan, which is shown as −1.81T yuan on the chart.

As shown in Figure 2, from 2022 to 2025, the net worth increment in each quarter fluctuates greatly, but overall it shows a “U-shaped” pattern: net worth accumulated during 2022–2024 keeps declining, and in some quarters the net worth increment is negative. But after 2025, the net worth increment shows a relatively clear rebound.

To better demonstrate the above process, we sum the net worth increment data over four periods, which can be understood as a smoothed annualized figure. The result is shown in Figure 3. From 2022 to 2025, a very clear “U-shape” is presented: 2022–2024 is a continuous downward stage, and net worth shows continuous declines in 2024 (net worth increment is negative). After entering 2025, the net worth increment shows a very significant rebound.

Figure 4 presents the estimated impact of the three factors—surplus, valuation, and liabilities—on the change in net worth increment. As shown in the figure, the peak of net worth increment in this round was Q2 2021, while the trough was Q3 2024, which is almost perfectly consistent with the downward phase of the manufacturing capacity cycle in this round (see CF40 Research · Briefing “Manufacturing Capacity Cycle Stabilization and PPI Repair Outlook”).

During this stage, the increment in net worth of the residents’ sector has been contracting continuously, and residents’ sector has experienced a “dual shock”: on the one hand, accumulated surplus (i.e., the money that can be saved) is decreasing; on the other hand, the valuation of existing stock assets continues to be impaired, including both real estate and stocks.

By 2025, both of these forces are improving: the pace of accumulating surplus is quickly repaired, and the valuation contribution is still negative, but on the margin the valuation losses are decreasing. By comparison, the impact of liability contraction on the net worth change of the residents’ sector is relatively much smaller.

We further break down the valuation losses into real estate and stocks. It can be seen that the reduction in valuation losses also comes from two parts. As shown in Figure 5, on the one hand, valuation losses caused by falling home prices begin to decrease in 2025. That is, home prices are still falling, but the decline has narrowed and the base is lower, so the residents’ sector’s valuation losses are declining. In other words, falling home prices are still causing valuation losses for residents, but marginally those valuation losses are shrinking.

On the other hand, valuation changes of stock-type assets start turning from negative to positive in 2025. As shown in Figure 5, the valuation of stock-type assets is negative for most of the period from 2022 to 2024. It occasionally turns positive, but after Q4 2024, the valuation of stock-type assets turns positive continuously and significantly. This is also an important factor driving the valuation effect.

In summary, the driving factors behind the changes in net worth increment across the two stages for the residents’ sector are different. From Q2 2021 to Q3 2024, the pace at which China’s residents’ sector accumulates net worth slows significantly. The most important reason is that real estate valuations continue to decline; this factor explains 80% of the decrease in net worth increment. Therefore, describing this stage as “falling home prices continuously damaging residents’ balance sheets” is sensible and accurate.

The rebound in net worth increment of the residents’ sector we observe since Q3 2024 can be explained to a large extent by the increase in current surplus. Put differently, in this stage, residents’ cash flow is improving and their capacity to accumulate surplus is strengthening. Because the rate of decline in home prices narrows, the current losses driven by real estate valuation decline also decrease, and marginally they contribute to the rebound in net worth even though real estate valuations themselves are still falling. By comparison, the contribution of stock-type asset valuations is smaller than that of real estate, but its main reason comes from stock price increases pushing stock-type asset valuation from negative to positive, which is a more positive development.

Therefore, even if the decline in home prices in 2025 continues to damage residents’ balance sheets, residents’ capacity to accumulate net worth is already improving. The increase in current surplus and the increase in stock valuations drive a large rise in net worth increment, and China’s residents’ balance sheets have entered a repair phase.

III. Residents’ home-buying behavior and investment behavior are changing in sync

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