MacroBrew – China Investor Forum: Beijing’s ‘Volcker Moment’

China’s curbs on the property sector likely mean sacrificing short-term stability, but could pave the way for Beijing to pursue long-term growth

  • China seems willing to sacrifice some growth stability to achieve the long-term targets of reducing its dependence on foreign high-tech goods, boosting birth rates and reducing income inequality.
  • It has attached national strategic importance to rein in the property sector, directly intervening in credit supply and leaving little scope to dial back these curbs.
  • In a sense, this could be China’s ‘Volcker moment’, considering Beijing’s strong willingness to sacrifice some near-term GDP growth for taming home prices and diverting financial resources out of the property sector.

In this episode of our Fireside Chats series we’ll be talking with Ting Lu, our Chief China Economist, on his thoughts on China’s property market curbs – or in his words China’s 'Volcker moment' – and what this means for the outlook.

Considering Beijing’s strong determination to tame home prices and divert financial resources out of the property sector, which accounts for a quarter of the country’s GDP, we believe this could be China’s ‘Volcker moment’.

During the late 1970s, former Federal Reserve Chairman, Paul Volcker, made a radical move to contain inflation in the US by pushing up interest rates to 20 percent. While the US economy went into recession in 1980-82, the move set the stage for economic expansion over the next two decades.

Similarly, China’s curbs on the property sector likely mean sacrificing short-term stability and growth, but could pave the way for Beijing to pursue long-term growth and achieve its targets of reducing its dependence on foreign high-tech goods, increasing the birth rate and reducing wealth inequality.

As achieving “common prosperity” becomes a top national priority, and Beijing directly intervenes in credit supply to the property sector, there’s little scope to dial back these curbs.

After all, home ownership is a root cause of wealth inequality in China, and surging housing costs have become the largest obstacle for families to overcome, inhibiting birth rates.

Beijing also wants to break purchaser expectations that home prices will continuously rise. Over the past two decades, the property sector’s too-big-too-fail image has become ingrained, with the government and central bank intervening time and again to stabilize growth. This has resulted in the channeling of an increasingly higher percentage of national savings and financial resources into the sector, which in turn squeezed investment in high-tech sectors, such as chip making and other priority areas.

A raft of recent policy measures and initiatives to curb property sector financing, especially those restricting developer debt levels and capping bank lending to the sector, have shown Beijing’s unwavering determination to tighten the sector. These have slowed the growth of credit supply, and elicited early signals of weakness in major property-related indicators. Beijing has also ramped up policy efforts to root out the misuse of business loans and consumer loans in the property sector, and we expect it to introduce a nationwide property tax in the next few years, which could dent real estate markets further.

Partly due to the slowdown in the property sector, we expect China’s year-on-year real GDP growth to drop from 7.9% in Q2 to 5.1% in Q3 and 4.4% in Q4. As for GDP growth in 2021, we have lowered our annual forecast to 8.2% from 8.9%.

However, after some quarters of low economic growth, the current property curbs may allow Beijing to successfully anchor Chinese household home price expectations at a low level, reduce funding costs for the economy, drive more savings into research and development and high-end manufacturing, and achieve more sustainable and inclusive growth.

To watch the full presentation, visit the Nomura Forum website (requires guest login). Access the report here.


    Ting Lu

    Ting Lu

    Chief China Economist


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