By Tom Hancock and Enda Curran November 16, 2021
China’s economy is slowing to the lows seen way back in 1990 — a price President Xi Jinping seems willing to pay to reduce its dependence on the property sector.
Beijing’s squeeze on the real estate sector will linger into next year and beyond, a development many hadn’t seen coming that has now prompted banks like Goldman Sachs Group Inc., Nomura Holdings Inc. and Barclays Plc to cut their growth forecasts in 2022 to below 5%. Bar last year’s pandemic year, that would be the weakest in more than three decades.
It’s a big stepdown from pre-pandemic rates closer to 7%. Given China’s status as the world’s second-biggest economy, it means softer demand for commodities pumped out by countries like Australia and Indonesia and slower spending by Chinese consumers who are crucial to multinationals from Apple Inc. to Volkswagen AG.
Economists are coming to realize that the Communist Party’s Politburo, the top decision-making body, was serious when it vowed this year not to use the property sector to stimulate the economy as they did following past downturns. Officials say excess supply of housing is a threat to economic stability, and want investment to go to prioritized sectors like hi-tech manufacturing rather than more apartments.
“President Xi thinks the property sector is too big,” said Chen Long, an economist at Beijing-based consultancy Plenum. “Xi is personally involved in real estate policies, so ministries don’t dare to ease policies without his approval.”
Rob Subbaraman, Nomura’s chief economist, estimates China’s slowdown to 4.3% next year from 7.1% this year “can directly reduce world GDP growth by around 0.5 percentage points.” Beijing is willing to “sacrifice some short-term growth for greater long-term stability,” he said.
Weak consumer spending is another drag on the economy, with China’s zero tolerance to sporadic coronavirus outbreaks and stringent lockdown measures spooking consumers and forcing business to shut.
“In the case of longer-lasting zero Covid policy in China or a much deeper property downturn, GDP growth in 2022 could drop to 4%,” Tao Wang, chief China economist at UBS AG, said in a note.
China’s property sector is the biggest question mark over the economy because of its huge scale — more than 900 million square meters of apartments are constructed each year, official data show.
That investment, plus the output of related sectors like steel and cement production, accounts for anything between 20% and 25% of China’s GDP, economists estimate. Any slowdown — or an outright decline — in real estate development would leave a gap in the economy that expansion in no other sector could easily fill.
“China’s property slowdown is a major headwind to the global economy because it is likely to be the biggest headwind to the Chinese economy next year,” said Larry Hu, chief China economist at Macquarie Group Ltd.
Real estate construction powered China’s V-shaped economic recovery from the pandemic, but the sector moved into contraction this summer after Beijing orchestrated a slowdown in mortgage lending that brought property developers such as China Evergrande Group close to bankruptcy.
The most spectacular decline has been in newly started housing projects, the steel-intensive part of real estate development, which fell more than 33% year-on-year in October, the biggest decline on record.
Property developers get most of their financing by selling homes to households before they are built. A pullback in mortgage lending, and a growing pessimism about the property market among households are causing sales to fall.
While the People’s Bank of China announced a slight uptick in mortgage lending in October, “the government is not rushing to stimulus even though starts have been collapsing,” said Rosealea Yao of Gavekal Dragonomics. Beijing’s recent announcement of trials of a property tax to discourage the purchase of housing as an investment will damage sales sentiment further, she added.
As a result, multiple economists predict a 10% decline in new housing starts next year. But because Beijing is concerned about risks to social stability if developers are unable to complete pre-sold projects, officials will try to ensure existing projects are finished. That means overall investment in real estate could grow next year even if sales and housing starts decline.
Morgan Stanley sees 2% growth in property investment next year, which would be down sharply from a pre-pandemic rate of 8%. Others, like UBS, are more pessimistic, predicting a 5% decline.
The slowdown could last for years: Goldman Sachs expects the housing sector to reduce GDP growth by 1 percentage-point annually each year through to 2025.
While Beijing has a lot of control over the housing market, it’s still possible the slowdown has self-reinforcing dynamics that could be hard for authorities to control, leading to an even sharper downturn than the more pessimistic forecasts. For example, Chinese households tend to avoid property purchases when prices are falling, which can lead to lower sales and more price declines.
If Beijing is serious about resolving imbalances in the property market, it would require a “multi-year slowdown in construction activity, which will certainly slow the economy given the property sector’s weight,” said Logan Wright of Rhodium Group. “A lot still depends on what Beijing does in the next couple of months.”
— With assistance by Cynthia Li, and Ailing Tan