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Thursday, 31 July 2014 00:00
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If China’s real estate corrects itself gradually, things will be fine. If not, get ready for a rough ride

Together with construction, China’s real estate accounts for 15% of 2012 GDP, a fourth of fixed-asset investment, 14% of total urban employment and around a fifth of all bank loans. Given the 10-12% fall in transactions and new starts, and the fact that real growth in investment has fallen from around 20% in 2012 and 2013 to around 10% in May, the sector clearly needs watching. Add to this the sharp increase in corporate debt—it rose from around 92% of GDP between 2003-07 to around 110% of GDP in 2013—and its concentration in real estate, and you begin to get a sense of just how tricky China’s slowing growth is going to be. The real estate market is slowing this time around due to huge oversupplies and the view that there are no more capital gains to be made—in other words, there aren’t too many policy levers in the hands of the Chinese government to prevent a loss of faith.

If the Chinese government is able to rebalance growth drivers away from investment to consumption and contain the shadow banking system—the health of this is also related to the health of the real estate sector—then all is well; and this is what the IMF hopes will come true, going by its latest Article IV consultation. The risks of the unwinding not being orderly, however, are also very high.


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