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China economy
OpinionComment
Yu Yongding
Yu Yongding

The View | China’s economy is struggling to heal from the self-inflicted wounds of its property market crackdown

  • Though necessary to combat soaring prices, China’s reining in of the real estate sector has slowed investment growth and weakened the economy
  • As Beijing seeks to stabilise growth, there is ample room to ease policy without letting developers fall back into their old ways

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A view of unfinished buildings on the man-made Ocean Flower Island in Hainan province on January 6. Authorities have ordered the 39 buildings to be demolished, accusing developers China Evergrande Group of breaching regulations, in yet another blow to the indebted firm. Photo: Reuters
Yu Yongding

Despite strong global economic headwinds, not least from the Covid-19 pandemic, China managed to achieve 8.1 per cent GDP growth last year, its highest rate in a decade. With that, China met the International Monetary Fund’s expectations and far surpassed its own government’s 6 per cent target.

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But China’s economic performance is not quite as strong as it may seem, and not only because year-on-year growth figures were flattered by the pandemic-induced trough in 2020, when the growth rate slowed sharply, to just 2.3 per cent.

China’s growth momentum was much weaker in the second half of the year (4 per cent, year on year) than in the first half (12.7 per cent), owing largely to the government’s efforts to rein in the real estate sector.
China has good reason to be vigilant. Housing prices have roughly tripled over the past 20 years, with the ratio of home prices to annual income now averaging 43.15 in Shenzhen, 42.47 in Beijing, and 33.36 in Shanghai, compared to 13.37 in London and 8.76 in New York City.

This partly reflects the misallocation of resources: China has built too many skyscrapers, luxury hotels and high-end flats, and not nearly enough affordable housing. Speculation is also a concern.

To stabilise housing prices, force real estate developers to deleverage and reduce commercial banks’ exposure to the sector, the government introduced three major policy measures, which began to take effect in 2021. The first was the imposition of “three red lines” for developers.
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In August 2020, China’s government declared that a few large developers could not have a liability-to-asset ratio of more than 70 per cent, a net gearing ratio of more than 100 per cent, or a cash-to-short-term-debt ratio of more than 100 per cent. Last year, these red lines were applied to the entire real estate sector. If crossed, regulators will impose tighter debt limits on developers.

China also introduced new caps on banks’ lending exposure to the real estate sector. For the big state-owned commercial banks, property lending cannot exceed 40 per cent of the total and mortgage lending is capped at 32.5 per cent. Limits for smaller banks are determined by regulators based on size.

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