China Economic Comment – April 2014

There have been concerns around China’s residential property market for a number of years, with bearish observers repeatedly describing the market as a bubble. In March 2014, these fears were elevated by the collapse of the Zhejiang Xingrun Real Estate Company.

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Residential property sector and risks for China’s short term economic prospects  

There have been concerns around China’s residential property market for a number of years, with bearish observers repeatedly describing the market as a bubble. In March 2014, these fears were elevated by the collapse of the Zhejiang Xingrun Real Estate Company, an unlisted private property developer.

Views around the real estate sector vary widely. Observers who anticipate a sharp correction in property prices cite speculative bubbles and highlight excess development with high profile ‘ghost cities’ and per capita floor space. Nomura, for example, considers the property sector to be China’s top risk (exceeding local government debt and shadow banking – although all of these factors are unquestionably linked). Those who are more optimistic tend to highlight the growth in urban incomes (which have exceeded some measures of prices), urbanisation and the scale of relatively undesirable legacy stock.

We see the risks around the housing sector being related more on the development side than consumer side, and hence are closely tied to concerns around local government debt (with land sales to developers a key revenue source) and shadow banking (which has become a key source of finance in recent years). The comparatively large equity that home owners hold in their properties could provide insulation in the event of a large correction in property prices. Even so, a correction in property prices could have a significant impact on the broader Chinese economy.

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