China’s property sector is the single largest contributor to GDP, accounting for roughly a quarter of the economy and a large proportion of local government revenues. Consequently, any slowdown in the property sector will have a large impact on GDP growth. Moreover, as the second largest economy in the world, weaker growth prospects in China have large implications for the global economy. For instance, in November the Federal Reserve raised concerns over possible spillover effects into the Chinese financial system more broadly, and from there to global financial markets given China’s huge size and trade links.
Looking ahead, the deleveraging process among China’s most at-risk developers will have a large impact on the property sector over the next few quarters. Moreover, China’s quarterly GDP outlook has deteriorated notably since headlines broke on Evergrande’s debt issues in August. Flagging market sentiment, illiquidity, weaker home sales and softer construction and investment activity are projected to be key drags on the overall Chinese economy in the short term. However, the potential for some policy support from authorities, as well as Beijing’s tight control over the financial system, should soften the blow and contain any threat to the broader financial system and global economic recovery.
Insights from Our Analyst Network
Commenting on the outlook for the property sector, analysts at Goldman Sachs noted:
“In the wake of continued physical market weakness, we see incremental policy support to help stabilize the property market. A number of developers commented a marginally looser credit environment in terms of mortgage issuance with improving cash collection ratio. Meanwhile, policymakers recently opened up the interbank bond market to developers. […] Looking ahead, we will continue to watch closely: policy developments, on both the demand and supply sides (incremental easing in mortgage policy, execution of centralized land auction, city level loosening/tightening policies and property sector related banking regulation updates, etc.); home-buyer sentiment; and developers’ landbanking, M&A activities, and deleveraging status.”
Furthermore, commenting on the GDP outlook, analysts at Nomura said:
“Despite […] fine-tuning of property curbs, we believe economic conditions are likely to further deteriorate as the pain threshold seems yet to be reached for Beijing to take real actions. Markets may still underestimate the upcoming pain likely ahead for both the economy and financial markets. We cut our Q1 2022 and Q2 2022 GDP growth forecasts to 2.9% yoy and 3.8%, respectively, from 3.4% and 4.4%.”
