China’s property crisis is expected to continue to slow its growth. The World Bank said on Sunday (Oct 1) it had cut its 2024 gross domestic product (GDP) growth estimates for the world’s second-largest economy to 4.4 per cent, down from its previous 4.8 per cent.
The bank cited elevated debt and weakness in the property sector as key drivers for this change, as well as longer-term structural factors.
HOW HAS THE PROPERTY DOWNTURN AFFECTED THE ECONOMY?
China’s GDP growth has been largely driven by investment in infrastructure and property, although years of rapid growth has left these sectors saddled with mountains of debt.
China’s aggregate domestic non-financial debt-to-GDP ratio has more than doubled according to the World Bank, from 132 per cent in 2007 to 285 per cent in 2023.
Following intense efforts from Chinese regulators to deleverage and reform the real estate sector, private developers began to default on their debt in the middle of 2021, leading to many unfinished homes and suppliers and creditors with unpaid accounts.
Besides contributing to around a third of China’s GDP, property accounts for 65 per cent of total household assets.
Housing prices in less developed cities have fallen more than 20 per cent since 2021, affecting already weak consumer and business confidence.
WILL THE PROPERTY CRISIS HAVE SYSTEMIC EFFECTS?
Chinese lending to property developers is relatively small – just over 5 per cent of onshore banks’ total loan book, according to Oxford Economics.
However, smaller regional banks’ non-performing loans ratios could worsen due to a higher level of exposure to the real estate sector as well as local government financing vehicles (LGFVs).
LGFVs are hybrid entities that are both public and corporate and were created to skirt restrictions on local government borrowing. They have proliferated since the global financial crisis in 2008. Local governments used their LGFVs to boost transactions in the land market last year to make up for a fall in purchases by property developers.
This prompted the Ministry of Finance to issue a statement instructing regional authorities to stop the practice, but the effort was not altogether effective. LGFVs still accounted for half of land purchases in 2022, compared to 33 per cent in 2021 and 17 per cent in 2020, according to Rhodium Group.
Given growing concerns over the default risk LGFV debt presents, the central government has said it was necessary to resolve the issue with “a comprehensive solution”. Source: SCMP
