Thursday, January 22, 2015

China’s economy slows as property prices slide

It was not a good week for China as new figures revealed economic growth had slowed to its weakest in 24 years, expanding 7.4% last year from 7.7% in 2013. Enviable by many other country's standards, but for China any slowdown could be disastrous if domestic spending does not keep afloat the economy as exports wane [BBC].

Property prices are already beginning to drop in a country where people buy housing stock as an investment rather than to live in. And the risk of a property bubble bursting is a very real danger.

The buying up of empty properties and leaving them empty has led to a massive increase in so-called ghost cities [CNN / Sky News].

Bursting bubbles

The situation could become very uncomfortable indeed. Not just for those with property investments who could lose millions. Even single-home owners may find themselves in negative equity. Such a bubble burst could dry up public confidence in spending which could lead to further economic woes [tvnewswatch: Will China's bubble burst as global economy slides? / Reuters / BBC]

There are few that would argue against the risks of a property bubble burst. But for China it would be particularly dangerous [FT].

For example, not only does the property market account for more than a sixth of the total GDP, property in the country is closely tied to various other sectors such as banking and construction [CNBC].

The real problem that is hindering banking is that property in China is used as the main form of collateral, and for the property market to collapse would mean default on loans that would have a trickling effect. Unlike other nations, Chinese private banks are closely tied to the government, often headed by ex-government officials and were used as key tools to implement their stimulus package in 2009. Being so closely tied to the government, while beneficial in backing, could in the same way turn parasitic should default on the big scale hit these banks that hold a majority of mortgages in the nation [SeekingAlpha].

"A property price crash in the world's second largest economy would have global implications," says Wells Fargo Securities economist Jay Bryson [Time].

But how bad could it be? There are some that suggest the results would not be as disastrous as doommongers predict. But there are some worse case scenarios that one cannot ignore.

Domino effect

A collapse in housing prices would result in fewer construction jobs, accounting for an estimated 60 million people in urban China. Jobless workers would of course spend less, which would mean goods and services the now-unemployed construction workers would normally purchase would not get bought.

If out-of-work construction workers reduce their spending on food and entertainment, the businesses that produce that food and entertainment will make less money and then some of their workers may face unemployment too.

Lower spending would mean people having less money in their paychecks, and the nation's GDP would suffer as a whole.

Moreover, if housing tanks, banks would see losses, resulting in the tightening of credit and fewer loans for people to start businesses. And as already stated, homeowners would spend less having found themselves in negative equity.

Countries outside China would also feel the pinch as export to the country dry up as demand would undoubtedly shrink.

"Don't lose sleep at night worrying about China," Bryson tells Time magazine. But nonetheless advises investors to "keep an eye on it." [Economist]

tvnewswatch, London, UK

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