Has China’s property bubble finally burst?

published 23 May 2014

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."

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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 recipefor future growth."

Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is especially interested in international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers. He often writes about Asian equities, international income and global asset allocation.

Cris began his career in financial services consultancy at PwC and Lane Clark & Peacock, before an abrupt change of direction into oil, gas and energy at Petroleum Economist and Platts and subsequently into investment research and writing. In addition to his articles for MoneyWeek, he also works with a number of asset managers, consultancies and financial information providers.

He holds the Chartered Financial Analyst designation and the Investment Management Certificate, as well as degrees in finance and mathematics. He has also studied acting, film-making and photography, and strongly suspects that an awareness of what makes a compelling story is just as important for understanding markets as any amount of qualifications.