Nicholas Gordon
·4 min read
China’s property sector is continuing its yearslong crisis, as giant property developers risk default and home prices continued to sink, perhaps by more than what official data suggests.
Real estate contributes about 30% of China's GDP, making it the single biggest contributor to the world’s second-largest economy.
That makes it the “most important single sector of the global economy,” James McCormack, Fitch’s global head of sovereigns, told Bloomberg TV in a Thursday interview.
“There’s a structural change underway, it is not going to be the growth driver of the Chinese economy the way it has been in the past,” he continued.
Yet China is unlikely to step in and provide "massive support to property developers", McCormack predicted, given Beijing’s previous wish to lower debt in the real estate sector and reduce property’s overall importance to the economy.
The decline of real estate was not "unintended," McCormack believes, even though the "spillovers to the broader economy and confidence" probably weren't expected by officials.
China's property crisis is just one warning sign for the country's economy, already struggling with stagnant consumption, high youth unemployment, and now potential liquidity issues in the financial sector.
Downgrading China's debt
Weeks after Fitch Ratings knocked the sovereign debt of the U.S. from the premium level, McCormack suggested how the world’s second-largest economy could also get its downgrade.
Fitch currently ranks China as A+, meaning it considers Chinese debt to be of “high credit quality.” The country has held that status since 2007, making it one of Fitch’s “most stable ratings,” McCormack said.
But if debt grows to dangerous levels in corporate and banking sectors it may become a “real [liability] for the government,” he said. If that prompts Beijing to step in, that may in turn push the rating agency to reconsider China’s rating, he suggested.
China’s “debt-to-GDP ratio is a little bit on the high side for a single ‘A’ credit,” McCormack said. China currently has a debt-to-GDP ratio of 281.5%, according to Bloomberg calculations—a record high.
When Fitch last affirmed its rating of Chinese debt in December, the rating agency cited "a sustained upward trajectory in government debt," and "abrupt policy shifts" as reasons that might lead to a downgrade.
Fellow rating agencies Moody’s and S&P both downgraded China in 2017, citing high levels of domestic debt.
McCormack said that the government extending its balance sheet to support the economy was unlikely. “Recent evidence doesn’t suggest that would be the case,” he told Bloomberg.
In fact, some economists are worried that Beijing is not spending too much money, but rather too little. China has largely avoided direct stimulus to boost its flagging economy, as officials resort to slashing interest rates and taxes instead of direct support to households.
Wary of stimulus
Unlike the U.S., China’s economy is anything but strong.
China reported below-expectations growth in retail sales and manufacturing on Tuesday, following an 89% plunge in new loans in July compared to the previous month.
The country’s statistics bureau also said Tuesday that it would stop measuring youth unemployment, which hit a record 21.3% in June.
Home prices continued their decline in July—perhaps even worse than what official data suggests—putting pressure on China’s private property developers.
Yet Beijing is avoiding the use of stimulus to boost consumption and the economy, instead relying on tax cuts and other incentives for businesses to spend and invest.
That’s starting to worry some prominent Chinese economists, who argue that Beijing needs to start giving money to households directly. Beijing needs to “use all reasonable, legally compliant and economic channels to put money in residents’ pockets,” Cai Fang, an adviser to the central bank, wrote in an article Monday. Cai has previously called for over $550 billion in stimulus to Chinese households.
Still, Chinese officials are wary of direct stimulus. Party officials have previously warned about “welfarism,” instead wanting Chinese households to build wealth through work.
This story was originally featured on Fortune.com
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As an expert in global economic trends and financial markets, my extensive knowledge in the field enables me to delve into the intricacies of the article by Nicholas Gordon dated August 17, 2023. The piece primarily focuses on China's property sector crisis and its potential ramifications on the country's economy, with insights from James McCormack, Fitch's global head of sovereigns.
1. China's Property Sector Crisis:
- The article highlights an ongoing crisis in China's property sector, marked by the risk of default among giant property developers and a decline in home prices. This crisis is portrayed as a significant and prolonged issue, influencing various aspects of the Chinese economy.
2. Economic Significance of Real Estate in China:
- Real estate contributes approximately 30% to China's GDP, making it the single most substantial contributor to the world's second-largest economy. James McCormack emphasizes the structural changes occurring in this sector and suggests that it won't be a primary driver of Chinese economic growth as it has been in the past.
3. Impact on Global Economy:
- According to McCormack, China's real estate sector is the "most important single sector of the global economy," underlining its interconnectedness with the broader international economic landscape.
4. Potential Downgrade of China's Debt:
- Fitch Ratings currently ranks China as A+, considering its debt to be of high credit quality. However, McCormack warns that if corporate and banking sector debt reaches dangerous levels, it could become a liability for the government, possibly leading to a downgrade.
5. China's Debt-to-GDP Ratio Concerns:
- China's debt-to-GDP ratio is highlighted as a point of concern, reaching a record high of 281.5%, according to Bloomberg calculations. This ratio is considered high for a single 'A' credit rating.
6. Government's Approach to Economic Support:
- Despite the economic challenges, McCormack predicts that China is unlikely to provide massive support to property developers, aligning with Beijing's previous stance on reducing debt in the real estate sector. The article suggests that Beijing's reluctance for direct stimulus contrasts with some economists' recommendations for more substantial support to households.
7. Wary of Direct Stimulus:
- The Chinese government is depicted as cautious about employing direct stimulus measures, opting for tax cuts and other incentives for businesses over direct financial support to households. This approach has raised concerns among economists who argue for more direct financial support to boost consumption and the overall economy.
8. Economic Indicators and Performance:
- The article touches upon various economic indicators, including below-expectations growth in retail sales and manufacturing, an 89% plunge in new loans in July, and the continuation of declining home prices in July. These indicators contribute to an overall picture of economic challenges faced by China.
In conclusion, my expertise in economic analysis supports a comprehensive understanding of the complex issues discussed in the article, offering valuable insights into the potential implications for China's economy and its global impact.
