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What China’s struggling property sector means for the global economy and markets
- A systemic banking crisis is predicted not to occur, with policymakers expected to remain vigilant in addressing stresses at rural and city-level banks to prevent a Japan-like scenario.
- The property sector is projected to drag GDP growth by over two percentage points in 2022 and 1.5 percentage points in 2023, contributing to a potential growth rate settling around 4%.
- Construction activity is expected to decline 50% to 60% and land sales by over 40% from peak levels, while secondary market prices in key cities have fallen approximately 20% since July 2021.
- The market is anticipated to remain depressed in the near term due to weak micro fundamentals and high household leverage, with further deterioration expected as secondary market risks persist.
- Sales in October are forecast to remain weak despite recent easing measures, with government actions expected to be slower and more piecemeal than the 2014–2015 cycle to avoid triggering a new housing bubble.
- Developers face a funding gap of approximately RMB 4 trillion over the coming two years, significantly exceeding current government support plans, while the RMB 350 billion delivery fund is currently estimated at 50% utilization.
- Property-related debt rose from roughly 10% of GDP in 2006 to 55% at the late 2020 peak, with total mortgage and developer debt outstanding reaching about $8.4 trillion.
- China's non-financial debt-to-GDP ratio increased from approximately 150% to 260% in the decade following the global financial crisis, with private sector leverage expected to decline as government leverage rises.
- A "stage two easing" is anticipated to be necessary to improve affordability in large cities and stabilize demand in the secondary market, which remains a key risk area with potential supply-demand mismatches.
- Government policy coordination across internet, healthcare, and finance sectors is viewed as essential to address household income and employment issues to support property demand.
- The economic transformation requires finding a new growth engine as urbanization dividends and property-driven expansion are no longer sustainable, with a lengthy correction expected to last years.
- The central bank is expected to instruct banks to increase lending during the downturn to prevent a credit tightening loop, structurally differentiating the response from the US subprime crisis.
- Mass foreclosures and fire sales are not expected to occur immediately due to stringent mortgage terms and high cash payments, though construction and supply chain disruptions may worsen.
- Existing developer inventory, if fully completed, is expected to account for roughly 34% of the total existing household housing stock, creating potential risks of excess supply.
- Previous measures, including 16 liquidity measures and mortgage restriction relaxations, are expected to have limited effectiveness due to slow implementation, with rhetoric on "studying" measures potentially delaying buyer purchases.