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Odds on a hard landing for China’s economy rising fastIt’s not just financial markets that are painting a grim picture. China’s real economy is also sending ominous signals of a slowdown in the property marketTom Holland16 December 2011It’s a scary thought, but fears are growing that China’s economy may already be crunching down to a hard landing.Certainly if you look to the financial markets for a snapshot of China’s economic health, then the picture looks ominous.The Shanghai stock market is down 22 per cent this year, and is now plumbing depths last seen in March 2009, in the depths of the global financial crisis.At the same time, the market’s enthusiasm for holding yuan is rapidly waning. In the offshore foreign-exchange market in Hong Kong, the yuan is quoted at a 0.8 per cent discount to the onshore exchange rate (see the charts), and the amount of yuan held in deposits in the city fell in October, dropping by 3.7 billion yuan (HK$4.5 billion).There are hints that mainland holders of the currency feel similarly downbeat. Gauging illicit flows of hot money into and out of the mainland economy is tricky. But recent estimates derived from the People’s Bank of China’s holdings of foreign currency indicate that over the last few months, capital has been flowing out of the mainland at a rate of about 150 billion yuan a month.Financial markets can get things wrong of course, but there are also worrying signals emerging from China’s real economy.Closely-followed indicators like HSBC’s flash purchasing managers’ index for the manufacturing sector are also entering the contraction zone. Meanwhile, export growth has slowed to the lowest level (barring distortions around Lunar New Year) since 2009.Even more troubling, there are signs that China’s property bubble is fast deflating. Although official indices show prices still rising, according to research firm Dragonomics big-city home prices have fallen by an average of 15 per cent over the last 12 months. Media reports from across the country describe a collapse in sales and price declines of 30 per cent or more in some cities.The prospect of a property crash is troubling on several levels. Most obviously, a big drop in prices will deter a lot of real-estate investment. That’s going to feel painful. According to official figures, a quarter of all China’s fixed-asset investment is poured into the real-estate sector. With investment responsible for powering more than half of China’s economic growth over the last couple of years, if all else was equal a 50 per cent fall in property investment would be enough to knock a percentage point off the economy’s growth rate.But all else would not be equal. A property crash would also punch a big hole in China’s consumer demand. Obviously, if the property market is depressed, fewer people will be making big-ticket purchases of fridges, televisions and furniture to fit out their new homes.But it goes beyond that. According to analysts at the Bank of America, more than half of all China’s household wealth is tied up in the property market. As a result, a big fall in prices will have a nasty negative wealth effect, deterring people from unnecessary spending as they rebuild their depleted savings.A deep fall in property prices would also erode the authorities’ ability to respond to slowing growth rates with economic stimulus measures.That’s partly because China’s local governments rely on land sales to generate as much as half their revenues, and with property prices down, developers’ demand for land has fallen too. According to Dragonomics, land sales were down 30 per cent year on year in October. That heavily reduces local governments’ fiscal firepower.
However, falling property prices are also likely to reduce the willingness of China’s banks to stimulate activity by ramping up lending as they did in 2009. Many developers are already facing problems servicing their existing debts, and a rise in bad loans to the sector looks inevitable. What’s more, lower property prices mean lower collateral values, which will also dent bankers’ enthusiasm for making new loans.Having said all that, a steep fall in growth rates is not yet a foregone conclusion. There is still a lot Beijing can do to loosen monetary conditions, ease taxes and boost spending. Even so, the odds against a hard landing appear to be getting longer all the time.
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