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Capital Markets

Should Beijing invest more in the property sector?

When China’s economy came under pressure in 2008, a huge stimulus programme initiated by the government saw the economy recover, with a lot of investment channeled into the property sector. This time around, investing in the property sector will not hold the same benefits.

Since the economic slowdown in China earlier this year, most China-watchers earnestly believed that the ruling party’s political might and policy savvy would pull the economy out of its trough.

But as GDP growth slowed down to 7.6% in the second quarter this year, for the sixth quarter in a row, analysts who predicted that the economy would rebound are at a loss. As signs of a recovery remain out of reach, optimism is beginning to wane.

Capital Economics harks back to a better time for the Chinese government when, following the economic crisis in 2008, a RMB4 trillion stimulus package was launched. Infrastructure and property development propelled a spirited economic rebound. Would a repeat of a property market rebound be the key to solving China’s downward spiral?

“A rebound in real estate investment of the scale we saw then [2008] would be enough to lift China’s growth over the next year by two percentage points. If everything else remained the same, this alone would be enough to push GDP growth back above 9%. The failure of the economy to turn around prompts the question of whether a strong economic recovery is even possible without strong growth in the real estate sector”  

China’s property sector has been in the spotlight of late. Over the last year, property prices have continued to fall and developers have struggled to get credit. In 2011, real estate investment accounted for 13% of China's overall GDP, according to government data. With the slowdown, this rate may be difficult to achieve at the end of this year. Either other sectors will have to pick up the slack, or the government will have to remove some of the tight constraints it has on the property sector right now. While on the surface, the stimulus package in 2008, and investment into the property market pulled up China’s economy, today, signs of sickness are seeping through. Local government debt and non-performing loans have soared since 2008. Fearing a real-estate bubble, the government is likely to keep tight controls on the sector.

Add images of deserted Chinese cities and empty homes seeping through to the media, and Capital Economics says “only the bravest of developers will embark on a large number of major new projects”. Thus a property sector-led rebound will be unlikely and a “sluggish economic recovery looks the most probable scenario”.

China still has ample policy firepower. As Europe’s woes continued to be felt globally and the property market at home buckled under the pressure, Beijing cut interest rates twice and lowered the cash reserve ratio for banks in a bid to stimulate the economy. But the property sector slowdown leads to a lot of hurt in other sectors too:

 “Strong growth in property construction and sales promotes investment in related industries producing building materials and the furniture and appliances that ultimately furnish new homes. When these secondary effects are added in, the property sector last year drove about a tenth of all spending in the economy. The impact doesn’t end there. Construction activity has fuelled booms in commodity-producing economies around the world. For example, the property sector, along with Chinese infrastructure, accounts for a full quarter of global steel demand.”
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