China: Economy increasingly exposed to a potential property downturn - NAB

Gerard Burg, Senior Economist at NAB, suggests that there are risks surrounding the slowdown in Chinese property markets, particularly if there is a sharp decline in prices and construction activity.

Key Quotes

“Fears around the scale and growth in China’s local government debt first emerged in 2013, when the National Audit Office revealed significant indirect debt obligations via local government funding vehicles. There remains considerable uncertainty around these debts (as data related to indirect exposures has not been updated since 2014) along with other hidden debt related to the growth of public-private partnerships (PPPs).”

“There is a crucial connection between local government debt and the real estate sector – with land sales a major source of revenue to service this debt. We would expect property developers will demand less land in 2018 (and potentially next year as well) as slowing sales flows through into weaker construction activity – hitting revenue as a sizeable quantity of debt matures.”

“In addition, household leverage and bank exposure to real estate has risen over the past decade.”

“China’s property sector has swung between boom and bust in recent years – with the most recent boom slowing across much of 2017. That said, the increasing debt related risks – particularly at the local government level but also for households and banks – leaves China’s economy more exposed in the event of a major downturn. Beijing will need to carefully manage debt and revenue related risks for local governments until a more sustainable funding source, such as the proposed property tax, can be implemented.”