China GDP: how will economic growth be hit by Beijing’s new caps on real estate lending?

China’s aggressive moves to tamp down risk in the real estate sector by curbing financing are not expected to significantly affect growth this year, provided other sectors of the economy continue to improve, economists have said.

The property market has been a major driver of economic expansion in recent years, particularly in the aftermath of the coronavirus outbreak, so a slowdown in the sector could have an outsize effect on the overall economy. One reason is that many other industries – such as construction and home and office furnishings – are dependent on it.

Real estate, excluding housing construction and some residential consumption, accounted for 7 per cent of Chinese gross domestic product (GDP) in 2019, while other industries that intersected with it accounted for 17.2 per cent of GDP, according to a report released in August last year by the Evergrande Research Institute, a China-based think tank.

Another 2020 report by Harvard and Tsinghua universities estimated that a 20 per cent drop in real-estate activity could lead to a 5-10 per cent fall in China’s GDP, all other things being equal.

China’s property market recovered quickly from the pandemic, with sales of new homes and flats growing 9.5 per cent in the first 11 months of last year compared to a year earlier, while property investment increased 6.8 per cent in the same period.

But recent government efforts to rein in runaway growth in the sector, which have underscored official concern about a property bubble, have raised questions about how a slowdown could affect the wider economy.

“We expect infrastructure construction and the real estate industry to slow down this year, but investment in the manufacturing sector may go up, which would offset the impact of the real estate sector on the growth,” said Ding Shuang, chief China economist at Standard Chartered bank.

Other economists were not as optimistic, warning China’s faltering rebound in consumer spending, hurt by the latest outbreak of coronavirus and possible restrictions on travel during the Lunar New Year holiday in February, might not be enough.

“Exports should remain relatively robust this year, but it may take a longer time for consumption to fully recover,” said Shao Yu, chief economist with Oriental Securities. “The slowdown in real estate may not be completely offset by the growth in exports and consumption.”

What is clear, however, is that the government wants to cool down the property sector to avoid risks rippling through to the financial sector and economy at large.

Guo Shuqing, the head of the China Banking and Insurance Regulatory Commission (CBIRC), the country’s banking regulator, said in November the property market was the biggest “grey rhino” risk facing the economy – that is, an obvious risk that is being largely ignored. The real estate market then accounted for 39 per cent of total bank loans in the country, he said.

Using Guo’s figure, property-related loans were equal to about two thirds of China’s GDP, according to South China Morning Post calculations.

To curb the risk, the government has taken a series of steps to reduce the financing available to the sector.

In December, the People’s Bank of China (PBOC) moved to cap lending for real estate after local government regulations passed in recent years failed to dampen the buyer frenzy, pushing up housing prices.

Prices for pre-owned houses rose 8.3 per cent in China’s four largest and richest cities in November, led by a sharp 14.6 percentage points rise in Shenzhen.

Under the central bank’s new rule, dubbed the concentration management system, limits have been set for the ratio of outstanding property loans to total loans in five different bank tiers, separated by size.

In tier one banks, including the six largest state-owned lenders and the government-run China Development Bank, the ratio is capped at 40 per cent, while the ratio for outstanding mortgages is limited to 32.5 per cent. The ratios for smallest tier five banks that operate in villages are capped at 12.5 per cent and 7.5 per cent, respectively.

Banks have up to four years to meet the new criteria.

Experts have said the move will have little effect on big banks, given most operate below the new limits. But smaller banks, which are dependent on local property lending for their business, will feel it more.

Credit access for the nation’s 12 major property developers was tightened on January 1 this year, with the amount of debt they could hold capped in relation to cash on hand, as well as against the value of total assets and as a proportion of equity in their businesses – dubbed “the three red lines”.

The policy signalled official concern about developers’ high-leverage business models, said Ding, from Standard Charter.

Liao Qun, chief economist and strategist for Citic Bank International, said authorities had acted to prevent additional risks resulting from China’s economic recovery.

“The Chinese economy is expected to rebound robustly this year, so real estate would be the first to develop a bubble again if there are no curbs, and that would be a problem,” he said.

The purpose of the new real estate regulations was to keep the sector’s growth rate in sync with that of the rest of the economy, and did not mean authorities wanted to “burst the bubble”, he added.

Shao, of Oriental Securities, said the government’s goal was to maintain modest growth in the sector.

“We call it the ‘silver age’ of the real estate industry, that is, maintaining a certain momentum, but housing sales have already peaked and they will not reach a new high in the next 15 to 20 years,” Shao said.