Is China at its ‘Volcker Moment’ as real estate curbs spiral out of control? More economists are joining the chorus in saying yes
- China’s property developers defaulted on US$6.2 billion worth of high-yield debt through mid-August, according to Morgan Stanley
Warnings that China’s campaign to cool its property market will go too far are multiplying.
Yet concern is growing that the impact of such policies spiral out of control. Nomura sees property curbs accounting for more than half of the slowdown in economic growth in the second half of the year. Restrictions on the real estate market also affect the sale of construction materials, furniture and home appliances.
“A rapid slowdown in property sector activities could lead to a significant spillover effect,” wrote Bank of America’s Ouyang Miao and Helen Qiao in a Monday note. “While the motivation for such credit tightening was to stabilise leverage and rebalance the economy, the risk is rising for growth instability amid fast deleveraging.”
“If one day the value of houses plunged below the mortgage value, people won’t even be able to repay their debt by selling the houses, and that would be a real crisis for the property market,” Li Yang, chairman of the National Institution for Finance & Development, was cited as saying by the official Economic Daily. Li spoke at a forum on August 29.
Perhaps the most visible shift has been the tightening of funding conditions for highly-leveraged developers, who rely on access to the bond market, bank loans and trust loans for liquidity. Once-prolific offshore issuer Evergrande hasn’t sold a single dollar note since January 2020. Yields on China’s dollar junk bonds, which are dominated by property firms, climbed last week to the highest level since the pandemic triggered a sell-off in March 2020.
“Markets over the near term need to be prepared for a likely marked growth slowdown, more developer defaults and home foreclosures, and perhaps some turmoil in stock markets,” Nomura economists led by Lu Ting wrote in a report last month.
There’s little sign so far that Beijing will pull back on its measures. According to Morgan Stanley, local governments may make adjustments depending on the conditions in their housing market, but they won’t be able to touch the “bottom lines” of home purchasing restrictions and caps on property prices.
“One of the key purposes of these recent regulatory measures has been to reduce liquidity-driven speculative flows into China’s property sector,” wrote Morgan Stanley analysts led by Kelvin Pang in a note last month. “We suggest that investors show caution during this period of China property sector regulatory reset.”