Slumping sales in China’s real estate industry could be devastating for local developers, but the knock-on effects could be even more damaging. Worried, we asked our readers last week about how a property collapse may affect the country’s economic outlook.
The majority of respondents wavered between mild pessimism (“After two years of cooling the market, China may struggle to restart it”) and extreme negativity (“China’s banks are doomed. Again.”). But our readers are not alone in their gloom. The OECD also weighed in on the matter yesterday, saying in a report that China’s slowing property sector is “a prominent domestic risk overshadowing the economic outlook”.
Some officials would probably even agree with that. After all, the government has spent close to two years trying to cool the property sector by making it harder for individuals to get mortgages and by choking off credit for developers. The problem is that mis-timing the relaxation of such measures could create new problems.
The big fear at the OECD is that a wave of bankruptcies among China’s developers would soon spread to the banks: “While the exit of small developers would not pose a problem, the failure of large promoters could put some bank lending at risk, perhaps triggering negative chain reactions,” it said in the report.
China’s regulators have been worried about this for some time now. In April, the country’s banking supervisor asked banks to stress-test their loan books against a 50% drop in property prices and a 30% slump in the number of transactions. The resulting clean bill of health did not convince everyone, but even if the test had been unquestionably thorough, regulators may have underestimated the severity of their own measures.
Although prices have so far held up reasonably well, transaction volumes have dropped sharply, threatening a downward spiral that could stress the banks to beyond their limits — and that could put China’s economy “over the tipping point”, as Nomura analysts reported last week.