Can a capricious economy save China from a hard landing?
The debate on whether China is due for a hard landing returned to the fore as property prices fell for a fourth consecutive month. And although analysts remain polarized in their views, some believe the country’s unconventional economic policy will prevent its economy going into free fall.
Chinese property prices continued to tumble in December, but it’s hoped that government intervention will stop the downward trend from spiralling out of control and causing irreversible damage to the economy. “To a certain extent, observers rely on the fact they don’t really understand how the Chinese economy works," says Stephen Lewis, chief analyst at Monument Securities. "They hope for something concrete that will break the cycle and they hope that the demand for property will rise again.”
Other experts agree.
“China has enormous control over its economy," says Frederic Neumann, managing director, co-head of Asian economics research at HSBC in Hong Kong. "If property prices plummeted drastically, the government can arrest the decline by loosening regulation. The government has a lot of muscle. If property prices were to continue falling, this wouldn’t necessarily drag the whole economy down. The government can and will stimulate growth if needed."
After the financial crisis in 2008, China announced a stimulus package of RMB trillion ($586 billion), which boosted development in infrastructure and real estate. But an over-stimulated economy in 2009 lead to a massive increase in property prices.
To reverse the trend of escalating property prices, the government raised reserve ratio requirements of banks and introduced micro measures to make property purchases more difficult.
“China's government policy succeeded,” says Neumann. "The property market peaked and prices are now dropping. But China would only be in for a hard landing if they have overplayed their hand and prices continue to fall. I don’t believe this is the case."
A recent reverse in policy saw the government cut reserve ratio requirements of banks to stimulate the economy. Meanwhile, Beijing has not pulled back on micro measures associated with buying property.
In China, it is still relatively difficult to take out a second mortgage and certain property taxes still exist, making buying property difficult despite falling prices.
“China has been able to loosen monetary policy while preventing the real-estate market from firing up again,” says Neumann.
However, not all analysts are confident in China’s might.
“Those who place hopes on Chinese policymakers saving the day yet again are bound to be sorely disappointed,” says Diana Choyleva, an economist at Lombard Street Research, based in Hong Kong. "Beijing is much less mighty and powerful now than it was three years ago. Administrative control seems to have helped the authorities achieve their objective of halting the house-price boom. But it risks a sharp property downturn and has hindered another of the authorities' stated objective – to raise domestic consumption."
As a result, “China is headed for a hard landing, driven by a sharp worsening of monetary conditions, decimated household wealth and company profits, and faltering global growth", she continues. "Real GDP growth is set to be well below trend in the first half of this year and could well reach 4% to 5% on a quarterly annualised basis.”
But others argue that China has the ability to stimulate consumer spending through other channels.
“China’s responsibility is in pricking the property bubble before it gets out of hand," says Neumann. "Indeed, consumption can be encouraged by other means, like lowering taxes and pumping money into social welfare, such as health and education. The government is successfully controlling this.”
As a result, experts say there is no possibility of an US-like subprime meltdown happening in China.
According to Neumann, compared to the US, only a small proportion of homeowners in China have taken out mortgages, which he estimates as less than 10%.
Furthermore, according to his analysis, the loan-to-value ratio is very low, at around 40% to 50%, which is substantially under US levels during the subprime crisis, when some loan-to-value ratios often exceeded 100%.
“I am not worried that we will see a US-type meltdown,” says Neumann.