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Property blues, high debt may hurt China
Publication Date : 17-07-2014
China's growth might have picked up slightly in the second quarter as a burst of government stimulus kicked in, but the world's second-largest economy is not out of the woods just yet.
Growth in the April-June quarter hit 7.5 per cent, up slightly from an 18-month low of 7.4 per cent in the first three months of the year, as Beijing sped up spending on railways and public housing and freed up more money for loans.
But with a weak property market and high levels of local government debt threatening to derail growth, the recovery remains a fragile one.
Experts say slower growth in property investment in the first half of this year, even as sales and new construction slipped, pointed to weakness in a crucial sector accounting for over 15 per cent of the country's annual gross domestic product (GDP).
Real estate investment, which directly impacts more than 40 other sectors from cement to furniture, for instance, rose 14.1 per cent in the first six months over the same period a year ago.
But this is down from an annual rise of 14.7 per cent in the first five months, data showed yesterday.
New property construction also fell 16.4 per cent in the first six months compared to the same period last year, raising fears that a sharp slowdown in the roughly 8 trillion yuan (US$1.29 trillion) sector could spill over to the broader economy.
"We expect the correction in the property sector to continue and this poses uncertainty to growth in the coming quarters," said Deng Weishen, a Hong Kong-based economist with Credit Suisse.
Despite figures in June showing a moderation in the slowdown as home sales rebounded from May, weak funding and sales growth continue to exert downward pressure on the economy, HSBC economist Julia Wang added.
Already, local governments are easing curbs on home buying to sustain the market.
Hohhot, capital of Inner Mongolia province, became the first city to scrap home-purchase curbs last month, followed by Jinan in eastern Shandong province this month.
But the credit-driven growth recovery in the second quarter is also worrying as it is unsustainable and does not represent quality growth, said Gavekal Dragonomics economist Chen Long.
Faced with the need to wean China off its export- and investment-led growth model, Beijing tried earlier this year to convince investors that it is willing to slightly miss its annual growth target of 7.5 per cent in return for better-quality growth.
But the authorities appeared to have backtracked after weak data early in the year caused alarm.
Since April, China has steadily relaxed policy by lowering banks' cash reserve requirements and instructing local governments to quicken spending.
Money supply also grew more than forecast, central bank data showed yesterday. While this might be positive for short-term growth, experts say it raises the risk of a sharper slowdown further out.
"Beijing can allow enough credit growth to prevent a further slowdown but, once the perpetual rolling-over of bad loans absorbs most of the country's loan creation capacity, it will lose control of growth altogether and growth will collapse," said Peking University's finance professor Michael Pettis in a note last month.
Rather than hailing the soft landing as a signal that Beijing is succeeding in managing the economic adjustment, it should be seen as an indication that Beijing has been unable to implement the reforms that it knows it must implement, he added.
But OCBC economist Tommy Xie said reforms are taking place, although selectively and at a gradual pace.
Measures to push capital account liberalisation, for instance, were announced just last week.
"Reforms are important but China is not going to sink the ship just for the sake of pushing reform," he added.
"It is a balancing act and in the light of the cooling property market, Chinese leaders are unlikely to bite the bullet now as stable growth is more important."
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