AI to Exacerbate China's Urban K-Shaped Divergence Amid Property Market Slump

China's real estate market has been in negative growth in recent years, leading to a 'K-shaped divergence' in development between first- and second-tier cities and third- and fourth-tier cities. Economist Lu Ting recently stated that China's artificial intelligence (AI) development, highly concentrated in a few major cities such as 'Beijing, Shanghai, Shenzhen, and Hangzhou,' will further exacerbate this divergence.

According to the Economic Observer, Lu Ting, Nomura China's Chief Economist, explained on the 11th during a media briefing the potential macroeconomic impacts of AI.

While AI globally drives 'K-shaped divergence'—benefiting capital holders and highly skilled workers while threatening many mid-to-low-level white-collar jobs—China has already entered its fifth year of property market downturn. Lu Ting noted that AI will further worsen the urban development gap caused by this prolonged slump.

China's real estate development investment turned from positive to negative annual growth in 2022 and has remained in negative territory since. In recent months, cities like Shanghai and Hangzhou have shown signs of stabilizing home prices after declines.

Lu Ting explained that under years of property market contraction, housing price drops have been more pronounced in third-tier and lower cities. As a result, middle- and low-income groups and migrant workers who bought homes in these areas are more vulnerable to price declines. As major cities gradually lift purchase and sale restrictions, human and financial capital are increasingly concentrating in first- and second-tier cities, further widening urban development gaps.

He emphasized that AI development is highly concentrated in a few megacities—Beijing, Shanghai, Shenzhen, and Hangzhou. Moreover, sectors like large AI models and chip design and manufacturing have extremely high entry barriers, making it unlikely for such advancements to spread to lower-tier cities in the foreseeable future. Unlike the export boom driven by the 'new three'—electric vehicles, lithium batteries, and solar panels—which benefited cities like Ningde in Fujian and Changzhou in Jiangsu, AI-driven prosperity is unlikely to ripple outward.

Lu Ting warned that AI-driven market growth may not spread like a wave to lower-tier cities and could instead replace large numbers of mid-to-low-level white-collar jobs in smaller cities.

This intensifying 'K-shaped divergence' is detrimental to China's urgent goal of boosting domestic demand. Lu Ting stated that when wealth and income are highly concentrated among a small group of people and cities, it becomes difficult to further stimulate consumption.

To mitigate the negative impacts of K-shaped economic trends, Lu Ting urged the government to remain cautious and avoid blind optimism amid AI's hype. Authorities should support regional AI development with local characteristics, enabling lower-tier cities to share in AI's benefits.

Additionally, he suggested strengthening the social security system to alleviate employment pressures from both property market downturns and AI-driven job displacement. The rollout pace of technologies with significant blue-collar job impacts, such as autonomous driving, should be moderately slowed.