The Chinese economy’s dependence upon the property sector to bolster growth could be undermining the government’s much-vaunted efforts to deleverage the market and avert financial catastrophe.
While China’s official GDP growth figure of 6.9% for the second quarter beat consensus forecasts, analysts point out that the health of the Chinese economy remains heavily dependent upon the property market, which accounts for a third of the total economy alongside construction and home furnishing.
The strong performance of the property sector may bolster the health of the Chinese economy in the short-run, yet high housing prices serve to undermine the transition to a more sustainable, consumption-oriented growth model, as they sap the disposable income of Chinese citizens despite ongoing gains in average wages.
According to analysts the need to keep the economy afloat by bolstering the property market with fresh credit is also stymieing the ongoing efforts by Chinese regulators to deleverage the financial sector in order to avert systemic risk.
“There hasn’t been too much deleveraging going on,” said Zhu Chaoping, an economist with the Shanghai office of UOB Kay Hian, to the Wall Street Journal.
Chinese banks made 1.54 trillion yuan in new loans in June, as compared to 1.1 trillion yuan the preceding month, while over a third of these new loans went to home purchases.
Any relent in growth during the second half will further weaken China’s deleveraging efforts, by compelling the central bank to loosen monetary policy by dialling down short-term interest rates and raising liquidity levels.
Policymakers also face the dilemma of needing to rein in the property market in order to avoid an asset bubble and bolster consumption, yet simultaneously prevent a crash in prices that would stymie growth or even capsize the economy.