China’s economic slump is deepening as the country’s prolonged property crisis continues to impact the economy. The exposure to real estate is threatening a spillover effect for financial firms, and a major trust company has missed payments to investors. In addition, new home prices fell in July, with more cities reporting declines. Despite rate cuts on Tuesday, analysts believe they are not enough to halt the slump.
Zhongrong International Trust Co., which has significant real estate exposure, has missed payments on dozens of investment products since late last month. This has raised concerns about China’s $3 trillion shadow banking sector, which is roughly the size of Britain’s economy. The shadow banking sector’s exposure to property and the risks it poses to the wider economy have been growing concerns over the past year. A string of defaults in this sector could have a chilling effect, as many individual investors are exposed to high-yielding trust products. Missed payments could further weaken consumer confidence without stronger support measures from Beijing.
Barclays and other global banks have revised their forecasts for China’s 2023 growth after weak data on Tuesday, citing a faster-than-expected deterioration in the housing market. Barclays lowered its growth forecast to 4.5% from 4.9%. So far, China has managed to avoid a spillover of the debt squeeze in the property sector to the financial industry. However, news of fresh defaults has triggered fears of contagion.
Adding to the concerns, China’s new home prices fell in July for the first time this year. This is the latest in a series of downbeat data that highlights the urgency for bolder policy support. While the decline is nationwide, smaller cities have been the hardest hit. Average new home prices in the 35 smallest cities surveyed fell for the 17th straight month in June on a year-on-year basis. The debt crisis at major developers, including Country Garden, China’s largest private developer, has scared away many home buyers. Property investment, home sales, and new construction have been contracting for over a year. Given that the property market traditionally accounts for about a quarter of China’s economy, the slump, combined with the impact of three years of strict COVID measures, has had an unprecedented impact on activity. Analysts expect further declines in home prices and sales in the coming months.
The weak economic data has led to calls for bolder support measures from China’s authorities to counter the downward spiral. The fallout from the property market crash is spilling over into the wider economy, as highlighted by Country Garden’s trouble. Experts believe that larger fiscal stimulus measures will be necessary to contain the adverse spillovers from the property sector. China’s property sector is still struggling despite financial support for developers and incentives for homebuyers. While some cities have relaxed property curbs to boost sentiment, economists expect the downturn in home sales and prices to persist unless there are major policy easing and fiscal support measures.
Overall, China’s economic slump is worsening due to the prolonged property crisis. The exposure to real estate is posing risks to financial firms, and missed payments by a major trust company have raised concerns about the shadow banking sector. Falling home prices and weak economic data have heightened the need for stronger support measures from Beijing. Without significant policy easing and fiscal support, the property market’s downturn is expected to persist, impacting sales and investment for a longer period.