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The debt problems facing China’s property sector are likely to cause a period of stagnation which affects both the domestic and global economy, according to George Magnus, economist and research associate at the China Centre at Oxford University.
Hong Kong-listed shares of Chinese real estate developer Kaisa Group Holdings were halted on Friday after news that it had missed a payment on a wealth management product. This came on the back of the protracted saga involving debt-ridden developer China Evergrande Group.
Of the challenges facing the world’s second-largest economy in the coming years, Magnus argued that debt — relating to the property sector in particular — could be the most problematic.
“I think it is the debt that really is the most imminent, and I think we can see this in the property sector, which is sort of a metaphor for what’s going on in the rest of the economy amongst local governments, state enterprises and so on,” Magnus told CNBC’s “Street Signs Europe.”
“I think the property market really has reached a tipping point now.”
Magnus suggested that after at least two decades of expansion in the Chinese real estate market, due to the government’s willingness to step in to boost the market when it began to look perilous, Beijing may no longer be willing or able to do the same this time around.
The Chinese embassy in London was not immediately available for comment when contacted by CNBC.
“Now, it is going pear-shaped again and I think the government really doesn’t want to rely on pressing on the credit accelerator again, because of the risk of egregious financial instability that might result,” he said.
“They are in a bit of a bind. I expect they will try to help the property sector out this year, and in 2022 before the congress in November, but I think the market faces years of stagnation, to be honest.”
29% of GDP
A research paper by renowned Harvard Professor of Public Policy and Economics Kenneth Rogoff and IMF Economist Yuanchen Yang, published in August 2020, estimated that the real estate sector accounts for around 29% of China’s GDP.
This includes housing investment, services such as managing, renting and buying, along with other inputs such as commodities and consumer durables.
“If 29% of GDP just marks time, let alone declines, for the next 10 years … you will know all about it, and people that sell into that market, whether internally or from outside, will also feel that,” Magnus said.
“The leverage which has basically driven that market and the companies like Evergrande … over the last 10 or 15 years, I don’t think that’s going to be there in the future. It’s not going to happen.”
His comments echo those of Texas A&M Economics Professor Li Gan, who said last week that the Chinese real estate sector has to become “substantially smaller” in order to keep the wider economy stable and healthy.
Gan estimated that 20% of China’s housing stock is vacant as buyers rack up second and third properties as investments, while developers continue to build millions of new units each year on the back of years of excessive borrowing.
– CNBC’s Yen Nee Lee, Weizhen Tan and Evelyn Cheng contributed to this report.