Fears of a crash in the Chinese property market are widespread in the financial markets. That is nothing new. The domestic real estate sector has been growing at breakneck speed ever since private property ownership was first permitted in 1998, and on several occasions, most recently in 2012, there have been dire warnings from western investors that housing supply was far outstripping demand.
An easing in monetary policy headed off a hard landing two years ago, but this may only have delayed the inevitable. The renewed correction in the market in mid 2013, which now seems to be gathering momentum, is certainly the main downside risk in the global economy in 2014.
Following the devastating global impact of the US property crash of 2005-08, it is little wonder that investors are paranoid that China might be treading the same path. But there are many differences between the US then and China now. The US housing crash was transformed into something far more serious by excesses in the financial sector, and by adverse wealth effects on consumer spending.
Even though China has also built up severe credit excesses in its shadow banking sector, it is hard to make the macro arithmetic add up to a shock comparable in size to the 2008 US/global meltdown.
(Apologies for greater length than usual in this blog – skip to “GDP effects” for the bottom line.) Read more