China's struggling property market: Will real estate woes spread?

Last year, the Chinese government implemented policy measures to cool its overheating property market known as the “three red lines”. This limited the amount of debt developers could hold relative to their assets, hampered companies’ ability to source financing and resulted in massive deleveraging for selected developers in order to comply with Beijing’s new rules. The government has since announced additional policies, further hampering developers’ balance sheets. The measures have had a notable effect: Property sales in China were down over 20% in October, while construction and investment activity have taken a hit so far this year. Evergrande Group—China’s second-largest property developer—has been a high-profile victim of the moves.

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.

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinion of FocusEconomics S.L.U. Views, forecasts or estimates are as of the date of the publication and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, other internet websites. FocusEconomics S.L.U. takes no responsibility for the contents of third party internet websites.

Author: Steven Burke, Economist

Date: November 22, 2021