George Magnus, the distinguished former chief economist of UBS, has written an interesting piece for the FT today on China's property sector. He argues that the financial markets haven't recognised the scale of the problems in the sector.
While it's generally understood that prices falling after years of chronic oversupply, Magnus fears that the links between residential and commercial property and China's shadow banking sector could destabilise China's financial system.
Here's a flavour: The Chinese property sector is in a recession. Market optimists insist it is going through an “adjustment” similar to previous property downturns.A more sober view, however, is that because of unprecedented overbuilding, and leverage nurtured by the eruption of shadow banking, this downturn is both more serious and systemic. China is probably in the first stage of a denouement of the property- and construction investment-led growth model of the past 15 years. Financial markets are having trouble pricing the implications.Property accounts for about 25% of capital investment, and roughly 13% of gross domestic product. Incorporating associated industries, such as steel, cement, and construction machinery and materials, would raise the investment share of GDP to about 16 per cent.If this leading edge of China’s growth model saw a fall in investment growth from 20 per cent to 10 per cent, economic growth would slide by roughly 2 per cent, taking into account secondary effects. The stream of downward revisions to economic growth is not over yet....
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