Property sector slowdown adds to China fears
by The Daily Lede
China’s economy slowed further in April as sales and investment in the country’s crucial real estate sector fell sharply.
Analysts and even normally tight-lipped Communist party officials are now asking whether the country’s real estate bubble is deflating or bursting after nationwide sales in the first four months fell 7.8 per cent in renminbi terms from the same period a year earlier.
Investment in real estate is the single most important driver of the Chinese economy and a crucial factor in global commodity demand and pricing.
However, newly started construction projects fell 22.1 per cent in the first four months compared with a year earlier, according to government figures released on Tuesday.
In an indication of just how exposed China’s economy is to a property downturn, Moody’s Analytics estimates that the building, sale and outfitting of apartments accounted for 23 per cent of Chinese gross domestic product in 2013.
That is higher than in the US, Spain or Ireland at the peaks of their housing bubbles.
Trouble in Chinese property also has implications for the country’s financial system, in particular the shadow banking sector, which has lent huge amounts to developers and relies on highly-priced land for collateral.
“Self-fulfilling expectations of falling house prices, financial difficulties among developers on the back of a highly leveraged economy with huge local government debt, and a fragile financial system with a large shadow banking sector, suggest the risks of a disorderly adjustment [in the Chinese economy] are real and rising,” said Jian Chang, Barclays’ chief China economist.
Partly as a result of slumping real estate investment, growth in China’s industrial production – a measure that correlates closely with gross domestic product – slowed marginally to 8.7 per cent from a year earlier in April.
Retail sales growth also slowed from 12.2 per cent expansion in March to 11.9 per cent in April.
In a worrying sign for western luxury brands that have become increasingly reliant on Chinese demand in recent years, gold, silver and jewellery sales plummeted 30 per cent in April from a year earlier.
Electricity production, a closely watched proxy for economic activity in China, grew at its slowest pace in nearly a year in April, up 4.4 per cent from 12 months earlier, compared with 6.2 per cent growth in March.
In spite of the problems in real estate, production held up relatively well in the cement and steel industries, both of which are plagued by chronic overcapacity.
The scale of China’s building boom in recent years is truly unprecedented.
In just two years, from 2011 to 2012, China produced more cement than the US did in the entire 20th century, according to historical data from the US Geological Survey and China’s National Bureau of Statistics.
In spite of much discussion of a “mini-stimulus” for China’s economy, Beijing has so far been reluctant to take strong actions to prop up growth.
The leadership is fearful of unleashing another credit and investment boom that could exacerbate already high levels of indebtedness and over-reliance on investment for growth.
In comments published on Sunday by the People’s Daily, the main mouthpiece of the Communist party, President Xi Jinping said the country needed to get used to the “new normal” of lower economic growth in China.
One reason for Beijing’s apparent nonchalance has been an improvement in trade, particularly with developed markets like the US, where Chinese exports rose 12 per cent from a year earlier in April, and the EU, where Chinese exports grew 15.1 per cent.
Exports have been helped by a government-engineered fall in the renminbi, which has experienced its largest and longest period of devaluation against the US dollar since the government loosened a longstanding peg in 2005.
On Tuesday, US Treasury secretary Jack Lew, who is visiting Beijing, called on China to “renew” its pledge to move to a more market-based and transparent exchange rate.
“As China’s economy continues to grow, it is important that China do so in a way that is fair, balanced and consistent with international trade rules,” Mr Lew said in a sign of Washington’s displeasure at the prospect of a steeper devaluation in the renminbi.