China's property slowdown means peak of growth cycle has passed

[BEIJING] China's economy hit a mid-year speed bump last month as factory output, investment and consumption slowed.

While there were multiple reasons - from a deleveraging push to capacity cuts to the simple fact that the heady pace of first-half expansion was always likely to prove unsustainable - one key cause of the weakness was a pullback in property.

Dubbed the most important sector in the universe in 2011 by a UBS Group AG economist, China's real estate market employs millions, drives demand for steel, cement and glass, and underpins consumption of everything from appliances to cars. So it's a big deal that the country's push to restrain prices is now starting to slow the pace of sales and development.

"Peak growth of the cycle is behind us," said Yao Wei, chief China economist at Societe Generale SA in Paris, citing a slump in housing sales growth, a leading indicator.

Here's how the property market is faring: The value of new homes sold rose 4.3 per cent in July from a year earlier, the smallest increase since March 2015, according to Bloomberg calculations based on data released Monday by the National Bureau of Statistics.

Swings in sales always alter property developers' confidence and lead changes in investment. Growth of that spending, which edged down to 7.9 per cent in July, underpins demand for construction materials. As commodity prices in China surge on reduced industrial capacity, weakening demand from real estate may erode those big gains.

Construction already looks more sluggish. Floor space of newly started homes declined 4.9 per cent from a year earlier in July, a slump from the 14 per cent increase the prior month. While building activities can be volatile and affected by weather, a continued drop or deceleration would also erode appetite for materials and threaten jobs in the sector.

Property is losing momentum at the same time as other pillars for domestic demand are decelerating. Fixed-asset investment in infrastructure, including roads, bridges, water projects and public facilities, decelerated slightly. Spending gains in manufacturing also decelerated to 4.8 per cent in the first seven months from 5.5 per cent in the first six.

It may be more difficult for the government to pick up the slack in the second half by boosting investment in infrastructure, as authorities splurged early this year to shore up the expansion and are discouraged from piling on more debt. Still, policy makers could release additional fiscal power if they see a risk that economic growth could be derailed.

Already Consumers have become a key stabilizer of the economy, and also could be hurt by a cooling property market. Besides a fading wealth effect for urban home owners if their home prices stagnate or drop, the housing market's direct links to retail sales may risk stalling. Sales of appliances, furniture, automobiles, and building and decoration materials all slowed last month from June.

The property market has cooled, but any further slowdown will be "at a gradual pace," a spokesman for the National Bureau of Statistics at a briefing in Beijing Monday.

BLOOMBERG