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Deep property downturn would knock up to 2 points off China’s GDP, Moody’s projects
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THE effect on China’s economy of a sharper-than-expected downturn in the property sector would be marked but manageable, a Moody's Investor Service report says.
A deeper property downturn could shave between 1.5 and 2 percentage points off China's GDP growth in the absence of an offsetting policy response, it said. But the central government would respond to a growth slowdown of that magnitude, according to Michael Taylor, a Moody's managing director who is also an author of the report.
In an attempt to estimate the possible economic and credit effects of a property downturn that is deeper than expected, Moody's developed two scenarios, which include a 10 percent fall in property sales volume for this year and next, a level of decline seen in previous property slowdowns; as well as a drop in transactions coupled with a 10 percent decline in property prices, not typical of previous property downturns.
Moody's said that neither the household nor banking sectors would magnify the economic impact of a property downturn, given relatively low household indebtedness and high capitalization and low non-performing loan ratios at its rated banks, which are also likely to enjoy substantial government support if needed. But the rating agency said the property sector weakness may spread to the rest of the economy through supply chain linkages, including the construction, metals and machinery sectors. These supply chain effects would be large enough to shave between 1.5 and 2 percentage points off China's economic growth under the two scenarios, the report forecast.
Should either of the scenarios for the property sector threaten to materialize, Moody's expects that the central government would respond with a stimulus package.
A downturn in property transactions would also negatively affect the finances of local governments, which rely to a large extent on land sales as a source of revenue, the report said.
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