Is China heading for stagnation as property slump goes Japan’s way in a deja vu crisis
- The spectre of a real estate crisis blowing up to become a full economic crisis looms large in China, Natixis says
- Beijing is likely to intervene to stabilise the financial market to prevent and avoid a property bubble such as that in Japan, National University of Singapore professor says
The spectre of a real estate crisis blowing up to become a full economic crisis in the world’s second-largest economy looms large, as household consumption and investment are likely to take a severe blow and the fiscal resources of the government are also limited because the funding crunch in the property segment also impacts land sales, a major source of revenue, according to Natixis Corporate and Investment Banking.
“It does look a little bit worrisome,” said Alicia Garcia Herrero, chief Asia-Pacific economist with the French investment bank. “It’s well known that if you have very low prices, that feeds asset price inflation. It happened in Japan and it’s what can happen in China, given that China has been undergoing deflationary pressures for so many reasons. One is ageing, the other is the idea of bursting of the bubble. For me, it looks like asset prices will need to correct structurally, but especially real estate prices.”
In the 1980s, with the Japanese having excessive savings and an easy monetary policy, the population kept buying property. This led to a massive property bubble in the 1990s, as investors were speculating that property prices would keep rising. The ensuing bubble led to Japan’s “lost decade”, when its economic growth stagnated and deflation was a consistent feature of the economy, according to Natixis.
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In China’s case, the high debt levels of private developers have been brought to the fore by Beijing’s “three red lines”, a set of requirements intended to curb risky borrowing. Unable to tap more loans, China Evergrande Group and other weaker developers have defaulted on their bond payments.