What China Property Crash? Analysts See Boost to Growth: Economy

May 23, 2014 4:39 am ET

May 23 (Bloomberg) -- China’s biggest homebuilding slump in at least four years isn’t enough to dissuade a majority of economists from predicting real estate will still contribute to 2014 growth. Property controls will be eased, they said in a Bloomberg News survey.

While 12 of 18 economists say China has some national oversupply of housing, only seven say the market is in a bubble state countrywide, according to the survey conducted from May 15 to May 20. Half see bubbles in some cities, and a majority says the loosening of restrictions on home purchases and loans will be limited to a regional level.

New construction has fallen 22 percent and sales have slumped 7.8 percent this year, testing the government’s four- year commitment to curbs targeted at making homes more affordable and its reluctance to enact broader economic stimulus. The slowdown’s depth will have implications for everything from demand for Australian iron ore to land sales that help local governments repay their $3 trillion of debt.

“China won’t fully lose the engine, but the engine will roar less than in the past and will be a more moderate supporter for growth,” said Louis Kuijs, Royal Bank of Scotland Group Plc’s chief Greater China economist in Hong Kong, who formerly worked at the World Bank.

Central bank Governor Zhou Xiaochuan said China may have housing bubbles in some cities, an issue that’s difficult to resolve with a single nationwide policy. The economy “can still manage something around a 7.5 percent growth rate,” Zhou said in an interview in Rwanda yesterday, referring to the nation’s expansion target for 2014.

Property Stocks

Chinese real-estate companies gained today on speculation the government will ease property curbs. An index of developers listed in Shanghai rose 2.1 percent at the close, the biggest advance since April 22. Poly Real Estate Group Co. surged 4.3 percent.

A manufacturing gauge released yesterday signaled the economy is stabilizing after the government announced tax breaks and faster railway spending to support growth. The preliminary purchasing managers’ index for May from HSBC Holdings Plc and Markit Economics unexpectedly rose to a five-month high of 49.7, approaching the expansion-contraction dividing line of 50.

UBS AG has estimated the real-estate industry accounts for more than a quarter of final demand in the economy when including property-generated needs for goods including electric machinery and instruments, chemicals and metals.

‘Doom Mongers’

Five of 17 respondents said the property market will make a net contribution to growth this year of 1 to 2 percentage points, while four said it would add less than 1 point and one analyst projected more than 2 points. Four people said there would be a drag of 1 to 2 points and two projected a subtraction of less than 1 point.

Next year, 10 economists see a net contribution to growth, while five expect a drag.

The nation’s housing market won’t crash like that of the U.S., Japan and Hong Kong, the official Xinhua News Agency said in an article published May 21 that called people forecasting such an outcome “doom mongers.” China will have strong housing demand because of continuing urbanization, speculative buying is less prevalent than it was in Hong Kong and mortgage debt as a proportion of GDP is lower than it was in the U.S., Xinhua said.

“China’s urbanization process is far from being over,” said Xu Gao, chief economist with Everbright Securities Co. in Beijing, who formerly worked for the World Bank. “The housing market is not seeing any structural turning point but rather suffering from a cyclical downturn, and the market can be brought back to life when policies become appropriate.”

New Buildings

That the property market is undergoing a slowdown is of little dispute. Floor space of new residential buildings under construction fell 23.8 percent last month from a year earlier, the steepest drop in figures going back to April 2010, according to data compiled by Bloomberg. April home prices rose in the fewest cities in 1 1/2 years, government statistics showed on May 18.

While a majority of respondents said China has an oversupply of housing, three said the current national supply is in balance with demand, even if some cities are facing issues, while two said the current supply is too small to meet demand.

Not everyone is optimistic. Moody’s Investors Service this week revised its credit outlook for Chinese developers to negative from stable. Ren Zeping, a researcher at the State Council’s Development Research Center, said economic growth may slow to about 5 percent in two to three years, the state-run Shanghai Securities News reported yesterday.

‘Biggest’ Risk

“Real-estate investment is the biggest macro risk,” said Zhu Haibin, chief China economist at JPMorgan Chase & Co. in Hong Kong, who sees an investment slump, including the effects on related industries, dragging growth down about 0.5 percentage point in 2014. “The government should do something to contain the downside risk. It’s probably time to remove the home purchase restrictions policy in most cities.”

At the same time, the probability is low that the government will ease curbs at the national level, Zhu said.

The world’s second-largest economy grew 7.4 percent in the first quarter from a year earlier, slowing from a 7.7 percent pace in the previous period, according to government figures. The median projection of economists for full-year growth of 7.3 percent would mark the weakest pace since 1990.

There are signs that the government is taking action to limit the real estate slump. The central bank this month called on the biggest lenders to accelerate the granting of home mortgages, while Southern Weekly reported yesterday that the housing ministry has allowed most cities to adjust home-buying curbs as they see fit.

“The government will be quite keen to avoid a very large downturn,” RBS’s Kuijs said. While real estate amplifies downward pressures on the economy, “it doesn’t have to be the end of the world,” he said.

--With assistance from Kevin Hamlin and Xin Zhou in Beijing.