Has China’s property bubble finally burst?

China’s real estate bubble has popped, says Nomura. The sector – long the subject of dire warnings by bearish analysts – “has passed a turning point”. It is “no longer a case of ‘if’, but rather ‘how severe’ the property market correction will be”.

A decline in real estate investment in four of China’s 25 provinces in the first quarter of this year is the first sign of slump that will spread nationwide, the analysts argue. Given the economic importance of real estate – construction and related industries are over 15% of GDP – that’s likely to push growth below 6% this year.

There are certainly reasons to be “increasingly worried”, say Tao Wang and Harrison Hu of UBS, although the outlook doesn’t have to be as bad as some observers expect. “The government still has the means and willingness to mitigate a property downturn, including by increasing infrastructure investment and relaxing property policies.”

As a result, the slowdown should be manageable and GDP growth is likely to average around 7% over the next two years. There is a small risk of a much more serious downturn that could see growth fall to 5% next year.

If the worst happens, the spotlight will be on the country’s financial sector as much as the builders, says Simon Rabinovitch in the FT. While individual homebuyers are typically not highly leveraged, there’s good reason to be concerned about the banks’ exposure to real estate developers and property investors, especially off-balance-sheet exposure in the fast-growing shadow banking system. Bad loans could be much higher than anticipated.

Still, “in one important respect, a property downturn would be a welcome development”. The economy has become far too reliant on property. “The sooner it ends, the sooner China’s banks will be able to find a more balanced recipe for future growth.”

• Stay up to date with MoneyWeek: Follow us on TwitterFacebook and Google+

MoneyWeek magazine

Latest issue:

Magazine cover
Heading higher?

Or are house prices set to fall?

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

'Would you rather upset God, or have Him just ignore you?'

In the first of three interviews with Merryn Somerset Webb, Hugh Hendry, manager of the Eclectica Fund, talks about what it takes to be a good hedge fund manager – and how he learned to stop worrying and love central banks.


Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.


21 November 1969: The first permanent Arpanet link

A milestone in the formation of the internet, the first permanent Arpanet link was established on this day in 1969 between researchers in the United States.