Wall Street banks have warned that the weakness in China’s real estate sector could impede the economy for years to come, and could even have an impact on countries in the wider region. Goldman Sachs economists led by China economist Lisheng Wang said in a weekend note that they see persistent weaknesses in the property sector, particularly related to lower-tier cities and private developer financing, and believe that there appears to be no quick fix for them. The economists also said that the property market is expected to see an “L-shaped recovery” – which is defined as steep declines followed by a slow recovery rate. Based on their estimates, the property weakness will likely be a multi-year growth drag for China, but it could be less painful in 2023 than in 2022.
Expectations for Policy Easing and Stimulus
Market watchers predict that China is likely to support the real estate sector through fiscal stimulus policies, expected to be released as the economy struggles to regain momentum after reopening from Covid-19. Hong Kong-listed Chinese property stocks jumped on Tuesday after the People’s Bank of China cut its seven-day reverse repurchase rate by 10 basis points from 2% to 1.9% – the first such cut since August. Property developer Logan Group rose as much as 4.5%, and Country Garden rose 4% on hopes of further stimulus and policy easing ahead. Goldman Sachs economists also noted that there are expectations for China’s government to introduce more housing stimulus packages to support the sector. They believe that the policy priority is to manage the multi-year slowdown rather than to engineer an upcycle.
Concerns for the Property Sector
Another concern for the property sector is the divergence between government-owned property businesses and private companies in the industry. JPMorgan’s Asia Chief Market Strategist Tai Hui said that if the challenges in the property sector deepen and bring risk aversion in the financial system and affect consumer confidence, this will cause a deeper slowdown in China. The property sector was also highlighted in a government work report released earlier this year, which called for support for people buying their first homes and to “help resolve the housing problems of new urban residents and young people.” Morgan Stanley, in its mid-year outlook report, warned that further weakness in the property sector will likely bring more headwinds for China’s growth. If the challenges in the property sector deepen and bring risk aversion in the financial system and affect consumer confidence, this will cause a deeper slowdown in China. If monetary easing measures fail to support the ailing property sector, it will also lead to concerns of a spillover effect in the rest of the Asia-Pacific region. In that scenario, confidence and financial conditions will tighten in China, which will have direct implications for China’s growth but also will negatively spill over to the region.
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