China’s economy is struggling to heal from the self-inflicted wounds of its property market crackdown
- Though necessary to combat soaring prices, China’s reining in of the real estate sector has slowed investment growth and weakened the economy
- As Beijing seeks to stabilise growth, there is ample room to ease policy without letting developers fall back into their old ways
Despite strong global economic headwinds, not least from the Covid-19 pandemic, China managed to achieve 8.1 per cent GDP growth last year, its highest rate in a decade. With that, China met the International Monetary Fund’s expectations and far surpassed its own government’s 6 per cent target.
But China’s economic performance is not quite as strong as it may seem, and not only because year-on-year growth figures were flattered by the pandemic-induced trough in 2020, when the growth rate slowed sharply, to just 2.3 per cent.
This partly reflects the misallocation of resources: China has built too many skyscrapers, luxury hotels and high-end flats, and not nearly enough affordable housing. Speculation is also a concern.
In August 2020, China’s government declared that a few large developers could not have a liability-to-asset ratio of more than 70 per cent, a net gearing ratio of more than 100 per cent, or a cash-to-short-term-debt ratio of more than 100 per cent. Last year, these red lines were applied to the entire real estate sector. If crossed, regulators will impose tighter debt limits on developers.
China also introduced new caps on banks’ lending exposure to the real estate sector. For the big state-owned commercial banks, property lending cannot exceed 40 per cent of the total and mortgage lending is capped at 32.5 per cent. Limits for smaller banks are determined by regulators based on size.
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Lastly, China overhauled how local governments sell rights to land. It is hoped that a limited number of centralised auctions will help to force down prices.
These measures go a long way towards explaining why the cumulative growth rate of real estate finance plunged from 51.2 per cent in January 2021 to 4.2 per cent in December. Over the same period, the cumulative growth rate of total home sales dropped from 133.4 per cent to 4.8 per cent in terms of square metres, and from 104.9 per cent to 1.9 per cent in terms of value.
As a result, the cumulative growth rate of investment in real estate development in China fell from 38.3 per cent to 4.4 per cent – a sharp decline, even taking the base effect into account.
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That is why, when GDP growth declined in the third quarter of 2021, China’s government tweaked its policies to curb excessive borrowing by property developers.
China’s government has emphasised that policies to address financial vulnerabilities and structural problems should not impede economic growth. But, when it comes to the real estate sector, that will not be an easy balance to strike – and, given the economy’s reliance on real estate, getting it wrong could have serious repercussions.
Beijing should have adopted more expansionary fiscal and monetary policies last year to boost overall growth. It should have made more efforts to boost growth in infrastructure investment as well, to offset the negative impact of the slowdown of real estate investment on economic growth. In fact, infrastructure investment grew by a measly 0.4 per cent last year, compared to 0.9 per cent in 2020.
Markets are confident that China will be able to achieve a growth rate of 5.5 per cent in 2022. With that, one hopes that the country’s lacklustre GDP growth, which has continued for more than a decade, will finally end.
