China’s property and construction sectors contracted in the third quarter for the first time since the start of the pandemic, hurt by a slump in real estate as the Evergrande debt crisis and the effects of Beijing’s tougher property market regulation spread to other parts of the economy.
Output in the real estate and construction industries shrank 1.6 per cent and 1.8 per cent respectively in the third quarter of 2021, according to a supplemental report on China’s gross domestic product released by the National Bureau of Statistics (NBS) on Tuesday. Both sectors contracted for the first time since the first quarter of last year, when the pandemic began.
A day earlier, NBS data showed the growth rate of China’s property development investment slowed to 8.8 per cent in the January-September period from 10.9 per cent in the first eight months of the year.
New housing starts for the first three quarters of the year also fell 4.5 per cent from a year ago just as China’s overall economic growth fell to a worse-than-expected 4.9 per cent in the third quarter.
The effects of Beijing’s crackdown on the overheated property market and a debt and cash crisis at the country’s biggest developer have started to ripple through the economy, manufacturers say.
“The Evergrande [issue] has had some impact on everyone‘s confidence,” Tang Xiuguo, president of SANY Group, a leading construction machinery manufacturer in China, said last week.
“The amount of work [for us] will not change [immediately], such as the amount of work [that needs machinery], but the problem is that we don’t know what the situation ahead will be.”
Domestic excavator sales by the country’s 25 leading makers fell by 38.3 per cent in September after dropping for six straight months, according to the China Construction Machinery Association on October 12.
The data is widely seen as a gauge of China’s economic growth momentum, and manufacturers attributed the larger drop in sales last month to the decline in the property sector and the impact of the Evergrande crisis.
“The economy needs the support of confidence. When everyone expects problems, it slows down the pace. In particular, equipment purchases are a kind of investment, and the pace will get slower,” Tang said.
Building and buying new houses has been a major economic driver over the past decade, and has propped up other ancillary sectors, such as home appliances and furniture. The country’s property sector once made up a quarter of the nation’s economy and half of the global construction business, data shows.
But large corporate and household debt accumulated during an aggressive property expansion prompted Beijing to overhaul the industry last August, curbing loans to developers and stressing that “houses are for living in, not for speculating with”.
As a result of the crackdown – aside from Evergrande – other large private Chinese developers may default in the next three to six months in a bearish scenario, while smaller developers could collapse, according to a note on Tuesday from BofA economists, led by the chief Greater China economist.
“Our bear case implies that significant property market turmoil could result in sustained growth dislocation in 2022,” they wrote in the note.
They cut real China gross domestic product (GDP) growth forecasts to 7.7 per cent, 4.0 per cent, and 5.3 per cent from 8.0 per cent, 5.3 per cent and 5.8 per cent for 2021, 2022, and 2023 respectively, following the latest official GDP data.
A series of Chinese cities have relaxed regulations around mortgage interest rates in order to boost the property market, but many economic commentators say that it will likely take much more damage to financial markets and the real economy before Beijing would be willing to unwind some of the curbs.
SANY’s Tang said he expected the sector would pull through despite the current crisis.
“The demand for housing is still large. There is such a large population and so many young people in China,” said Tang. “Winter is coming soon … If we get ready, there will be no problem and we know the next summer will come.”Internet Explorer Channel Network