Is China at its ‘Volcker Moment’ as real estate curbs spiral out of control? More economists are joining the chorus in saying yes

Economists at Nomura Holdings are calling the curbs China’s “Volcker Moment” that will hurt the economy. The credit squeeze in the property sector is “unnecessarily aggressive” and may weigh on industrial demand and consumption, wrote colleagues at Bank of America. A prominent Chinese economist cautioned of a potential crisis should home values drop below mortgages.

Stabilising China’s housing market under the mantra of “housing is for living, not for speculation” is one of the many campaigns being waged by Xi Jinping as he seeks to reduce the cost of raising a family and defuse risks in the financial system. Yet it’s also one of the toughest goals to achieve given the vital importance of the sector to the economy – the industry accounts for more than 28 per cent of gross domestic output.

The regulatory tightening appears to be working, after monetary easing last year spurred price gains. Property loans rose at the slowest pace in eight years in the first seven months of the year, according to the banking and insurance regulator, while home price growth dipped to a six-month low in July.

Efforts to enforce discipline among overleveraged property developers are also biting. Property firms defaulted on US$6.2 billion worth of high-yield debt through mid-August, or about US$1.3 billion more than the previous 12 years combined, according to Morgan Stanley.