China’s economic growth would fail to top 3% over the next two years in the event of a property market crash where government stimulus is still not enough to offset the damage, according to a Bloomberg Economics analysis that underlines the importance of real estate to the nation’s recovery.
(Bloomberg) — China’s economic growth would fail to top 3% over the next two years in the event of a property market crash where government stimulus is still not enough to offset the damage, according to a Bloomberg Economics analysis that underlines the importance of real estate to the nation’s recovery.
A 15% drop in property investment over the next year — which is not in Bloomberg Economics’ base scenario for growth — would create a “crash landing” that deals a “devastating blow to China’s economy,” economists Chang Shu, Eric Zhu and Ana Galvao wrote in a report that explored scenarios for a “sudden collapse” in the sector. The Bloomberg Economics model looks at impacts on growth through changes in investment, bank lending and added uncertainty.
Assuming the government taps stimulus to stem such a crisis in the form of policy rate cuts and widening the fiscal deficit, the property slump would cause gross domestic product growth to slow to 2.9% in 2023 and 2.8% in 2024, the economists estimated. Bloomberg Economics currently forecasts GDP to expand 5.8% this year.
China’s GDP grew 3% last year, the second slowest pace since the 1970s.
Without any policy response, the downturn would be even more grim: GDP would increase just 1.9% this year, followed by a 0.4% contraction next year, the economists wrote. In that scenario, the property crisis would spill over into global markets. The VIX index would jump 10 points, in line with 2015 when China’s stock market collapse and currency devaluation sent shock waves around the world.
As a result, Beijing would likely overlook concerns about government debt to do “whatever they can to offset the drag” should such a crisis materialize, the Bloomberg economists wrote — including cutting policy rates by 75 basis points in the first year. In the scenario that includes policy support, the fiscal deficit would rise by 2% of GDP.
What Bloomberg Economics Says …
“What happens if the slow-motion decline in China’s property market morphs into a sudden collapse? That’s not Bloomberg Economics’ base case — we think Beijing has the tools to prevent a crisis. Still, massive overbuilding and high debt mean a crash is a real risk.”
— Chang Shu, Eric Zhu and Ana Galvao, economists
Read the full report here.
Bloomberg Economics’s base case is for property investment to fall 3% this year compared to 2022. Other economists forecast investment to remain flat or record growth in the low single digits this year — a reversal from last year’s 10% contraction, due to new government policies to support the sector.
Whether housing investment will recover this year is one of the main uncertainties for China’s economy. Real estate investment fell 5.7% in the first two months of the year compared with the same period in 2022, according to official data.
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