China property crash would cap growth at 3%: Bloomberg Economics

China’s economic growth would fail to top 3 per cent over the next two years in the event of a property market crash where government stimulus is still not enough to offset the damage, according to a Bloomberg Economics analysis that underlines the importance of real estate to the nation’s recovery. 

A 15 per cent drop in property investment over the next year – which is not in Bloomberg Economics’ base scenario for growth – would create a “crash landing” that deals a “devastating blow to China’s economy,” economists Chang Shu, Eric Zhu and Ana Galvao wrote in a report that explored scenarios for a “sudden collapse” in the sector. The Bloomberg Economics model looks at impacts on growth through changes in investment, bank lending and added uncertainty.

Assuming the government taps stimulus to stem such a crisis in the form of policy rate cuts and widening the fiscal deficit, the property slump would cause gross domestic product growth to slow to 2.9 per cent in 2023 and 2.8 per cent in 2024, the economists estimated. Bloomberg Economics currently forecasts GDP to expand 5.8 per cent this year.

China’s GDP grew 3 per cent last year, the second slowest pace since the 1970s.

Without any policy response, the downturn would be even more grim: GDP would increase just 1.9 per cent this year, followed by a 0.4 per cent contraction next year, the economists wrote. In that scenario, the property crisis would spill over into global markets. The VIX index would jump 10 points, in line with 2015 when China’s stock market collapse and currency devaluation sent shock waves around the world.

As a result, Beijing would likely overlook concerns about government debt to do “whatever they can to offset the drag” should such a crisis materialise, the Bloomberg economists wrote – including cutting policy rates by 75 basis points in the first year. In the scenario that includes policy support, the fiscal deficit would rise by 2 per cent of GDP. 

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Bloomberg Economics’ base case is for property investment to fall 3 per cent this year compared with 2022. Other economists forecast investment to remain flat or record growth in the low single digits this year – a reversal from last year’s 10 per cent contraction, due to new government policies to support the sector. 

Whether housing investment will recover this year is one of the main uncertainties for China’s economy. Real estate investment fell 5.7 per cent in the first two months of the year compared with the same period in 2022, according to official data. BLOOMBERG