China’s ongoing property slowdown is having a meaningful impact on its near-term growth outlook. The property sector has been a key driver of Chinese growth, directly accounting for about 14% of GDP. In mid-September, Fitch revised down its annual GDP forecasts by 0.3bp in both 2021 and 2022, to 8.1% and 5.2%, respectively. While numerous factors were behind the forecast revision, including the impact of coronavirus containment measures, it was principally driven by the downturn in the property and credit cycle.
The Chinese economy was among the earliest globally to emerge from pandemic-induced lockdowns in mid-2020, which was soon followed by a sharp pick-up in property sales and construction activity. This rebound was an important support to China’s pandemic recovery, enhanced by a surge in investment spending linked to the authorities’ counter-cyclical fiscal stimulus efforts. Since then policy stimulus has faded. As part of the authorities’
broader financial de-risking goals, macroprudential measures have been adopted to curb property-related borrowings, including the “Three Red Lines” for developers.
Partly as a result, residential property starts have been contracting on a yoy basis since April 2021, while real-estate investment has been steadily decelerating. Property sales have also been falling since July 2021, though are still up by nearly 16% year-to-date. China has experienced numerous property cycles over the years. Fitch does believe the current downturn will destabilise the economy or the financial sector, as inventories are well below prior highs (e.g. 2015), and household mortgages are of adequate credit quality, with implied loan-to-value ratios under 50%. However, we expect residential construction to slow in the medium term, which will likely have implications for China’s own trend growth rate, with potential spillovers for global commodity exporters.
There are near-term risks associated with the probable default of Evergrande, a major property developer. However, Fitch believes the government will seek to minimise the impact on consumer confidence by protecting households’ deposits for uncompleted homes and by avoiding major disruptions to funding markets. The authorities are already recalibrating macro policies to cushion the impact of the slowing activity. The rating agency expects the PBOC to make further cuts in banks’ reserve requirement ratios, while infrastructure investment is likely to get a boost from stepped-up municipal bond issuance.
Also, it believes tighter macroprudential regulations for property developers will broadly remain in place.
For Fitch Ratings- by Andrew Fennell
