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China’s real estate suppression has reduced economic growth to the level of the 1990s financial market

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China’s economy is slowing to a low point in 1990-President Xi Jinping seems willing to pay the price for reducing reliance on the real estate industry.

Beijing’s squeeze on the real estate industry will continue until next year and beyond. Many people have not seen this development. Now it has prompted banks such as Goldman Sachs, Nomura Holdings and Barclays to lower their growth forecasts for 2022 to less than 5%.

Except for the pandemic year, this will be the weakest year in 30 years.

This is a big drop from the pre-pandemic rate of close to 7%. Given China’s status as the world’s second-largest economy, this means that demand for commodities in countries such as Australia and Indonesia is weak, while consumer spending in China, which is vital to multinational companies such as Apple and Volkswagen, has slowed.

Economists have gradually realized that the Politburo, the highest decision-making body of the Chinese Communist Party, was serious when it vowed this year not to use the real estate industry to stimulate the economy as it did after the downturn in the past.

Officials said that oversupply of housing poses a threat to economic stability and hope that investment will flow to priority areas such as high-tech manufacturing, rather than more apartments.

“Chairman Xi believes that the real estate industry is too big,” said Chen Long, an economist at Plenum, a Beijing consulting firm. “Xi Jinping personally participated in the real estate policy. Without his approval, the ministries dare not relax the policy.”

Nomura Chief Economist Rob Subbaraman estimates that China’s economic growth rate will slow from 7.1% this year to 4.3% next year, which “can directly reduce world GDP growth by about 0.5 percentage points”. He said that Beijing is willing to “sacrifice some short-term growth for greater long-term stability.”

Coronavirus outbreak

Weak consumer spending is another drag on the economy. China has adopted a zero-tolerance approach to sporadic coronavirus outbreaks and strict lockdown measures, causing consumers to panic and forcing companies to shut down.

Wang Tao, chief China economist at UBS Group, said in a report: “If China implements a longer-lasting zero-coronavirus policy or a more serious real estate downturn, the GDP growth rate in 2022 may drop to 4%.”

Official data show that China’s real estate industry has become the biggest question mark of the economy because of its huge scale-more than 900 million square meters of apartments are built every year.

Economists estimate that this investment, together with the output of related industries such as steel and cement production, account for 20% to 25% of China’s GDP. Any slowdown in real estate development — or a complete decline — will leave a gap in the economy that cannot be easily filled by the expansion of other sectors.

“The slowdown in China’s real estate is a major obstacle to the global economy because it may become the biggest obstacle to the Chinese economy next year,” said Larry Hu, chief China economist at Macquarie Group.

China’s strict “zero COVID” policy drags down consumer spending [FILE: Roman Pilipeyepa/EPA]

Real estate construction has promoted the V-shaped recovery of the Chinese economy from the pandemic, but the industry began to shrink this summer after Beijing’s orchestrated mortgage slowdown caused real estate developers such as China Evergrande Group to be on the verge of bankruptcy.

The largest decline was in newly-started housing projects, which are the steel-intensive part of real estate development, which fell more than 33% year-on-year in October, the largest decline on record.

Real estate developers obtain most of the financing by selling houses to families before they are built. The decline in mortgage loans and households’ growing pessimism on the real estate market have led to a decline in sales.

Although the People’s Bank of China announced a slight increase in mortgage loans in October, “although the operating rate has been declining, the government is not in a hurry to take stimulus measures,” said Rosealea Yao of Longzhou Economic News.

She added that Beijing recently announced a pilot property tax to curb the purchase of housing as an investment, which will further damage sales sentiment.

Therefore, many economists predict that the rate of housing starts next year will drop by 10%. But because Beijing fears that developers’ inability to complete pre-sale projects will bring risks to social stability, officials will work hard to ensure that existing projects are completed.

This means that even if sales and housing starts decline, overall investment in real estate may increase next year.

China’s housing sales and construction are expected to slow in 2022 [Qilai Shen/Bloomberg]

Morgan Stanley expects real estate investment to grow by 2% next year, which will be significantly lower than the 8% before the pandemic. Others, such as UBS, are more pessimistic, forecasting a decline of 5%.

This slowdown may continue for several years: Goldman Sachs predicts that by 2025, the real estate industry’s annual GDP growth rate will drop by 1 percentage point.

Although Beijing has great control over the real estate market, the economic slowdown may still have a self-reinforcing drive, and the authorities may find it difficult to control, leading to a recession that is more severe than the more pessimistic forecast.

For example, Chinese households tend to avoid buying real estate when prices fall, which may lead to lower sales and greater price drops.

Logan Wright of the Rhodium Group stated that if Beijing really wants to solve the imbalance in the real estate market, it needs to “slow down in construction activities for many years. Given the weight of the real estate industry, this will definitely slow down economic growth.” “Much still depends on Beijing’s actions in the coming months.”



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