China Goes Cold Turkey on Property

Weak economic data show just how complicated any transition away from real estate could be

By Nathaniel Taplin

A police officer talking to people gathered at the headquarters of the troubled property developer Evergrande on Wednesday. Real-estate activity in China continues to plummet./ PHOTO: NOEL CELIS/AGENCE FRANCE-PRESSE/GETTY IMAGES

Beijing has decided it wants a German economy: lots of high-tech manufacturing and exports, high savings—and definitely no American-sized housing bubbles.

But China has long been a property-centric economy. Weak economic data for August released Wednesday show just how complicated any transition away from real estate could be, as Beijing continues to mercilessly squeeze property developers.

Policy makers have been counting on buoyant exports and household spending to offset the knock from slowing construction and property investment. 

Exports are still in good shape, but the other half of that thesis—on consumption—is looking very shaky. 

If exports stumble or consumption doesn’t pick up again promptly, Beijing may be forced to relent on its property curbs sooner than it would like and pivot back toward an easier monetary stance.

The political calendar is running out: Next fall the 20th Party Congress will arrive, when most observers expect Xi Jinping to bid for a third term at China’s helm. 

He may be reluctant to permit a deep property-induced slump at such a sensitive time, even assuming the country manages to escape serious financial turbulence associated with the woes of developers such as Evergrande.

August weakness in services and consumer spending was expected given the harsh measures used to control the midsummer Delta variant outbreak in eastern China. 

But the magnitude of the damage still caught analysts by surprise—retail sales rose just 2.5% year-over-year, down from 8.5% in July and well below economists’ expectations of 6.3%. 

September could end up weaker than expected too: A new outbreak in Fujian province is likely to deal further damage, especially if it spreads beyond the province.

Meanwhile, real estate activity continues plummeting. 

Property investment rose just 0.3% year over year in August. 

Excluding January and February 2020, that was the weakest since 2015, during the last major housing downturn. 

Home prices in large coastal markets are mostly still rising, but those in many smaller, so-called third- and fourth-tier cities have begun to fall. 

Land sales by value fell 90% year over year in the first 12 days of September, according to Nomura.

Developers’ housing inventories are far lower than during the 2015 crash in most parts of the country, according to ANZ Bank—with the notable exception of China’s northeastern Rust Belt. 

That may help limit falls in home prices. 

But it can’t prevent a substantial hit to economic activity as new construction projects are put on hold. 

And sharply falling land prices could cause other problems: Land sales are a key source of local government revenue, while developers who levered up to buy expensive land will be left holding the bag, adding further strain to their overstretched balance sheets.

There was never going to be a good time to wean China off property—if such a thing is possible. 

Beijing’s economic policy makers are having a decent go at it right now. 

But the odds may no longer be in their favor.

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