China's property market downturn

The downturn in China's property market continues. In our view, spillover into a broader financial crisis with global ramifications is unlikely. Most of the sector's debt is domestic-facing and so structured that risk of systemic defaults is low. Also, government  spending on "major" infrastructure and lower interest rates globally should support economic growth, and P&C insurance in particular.

• The property market downturn in China will likely continue to weigh on investment and consumption.
• The likelihood of a broader financial crisis with global spillover effects, however, is limited, in our view.
• The government has taken actions to deleverage the mortgage loans sector and widespread household defaults are unlikely.
• Corporate debt is mostly with  commercial banks with low non-performing loan ratios. The end of the global rate hike cycle should also ease debt repayment pressures.
• In addition, the government is targeting fiscal spend on "major" infrastructure areas in 2024, which should support economic growth and business in P&C insurance.  

China's real estate market has been in prolonged downturn, as evidenced by an ongoing decline in both investment in and sales of property since February 2022 (see Figure 1). This has given rise to fears of a looming financial crisis and a potential hard landing in China, with global spillover effects. Such a crisis would raise Chinese investor default risk, also on global assets, leading to tighter liquidity conditions in capital markets and dragging on global growth.

At the dawn of the new year, in our view, a financial crisis in China with said ramifications is unlikely. First, the real estate sector's debt levels have peaked, and existing dues are mostly domestically-oriented. Second, with government policies to deleverage, outstanding household and corporate debts are so structured that risk of widespread defaults is low. Third, fiscal spending on "major project" areas like affordable housing in 2024 should further stabilise the property market, and help restore consumer and investor confidence. This will support underlying economic growth, albeit at a new lower norm. It should also boost business in China's Property and Casualty (P&C) insurance sector.

Figure 1: Property sales and investments (% yoy)

The downturn in the property market has been driven by cyclical such as slowing income growth during the pandemic, and structural factors including shrinkage of the working-age population in China, diminishing returns on investments and slower growth in total factor productivity. The slump has hit household and business confidence, holding back domestic growth and increasing the risk of a liquidity trap.¹ The spillover effects to the economy have been mainly through a fall investment and consumption, estimated to affect around 24% of the real estate-related value chains that make up GDP.² We expect reduced investment in real estate will shave 0.5-0.7 percentage points off GDP in 2024. Our forecast for full-year growth in China is 4.5%.

The global interest rate hiking cycle of 2022-23 triggered several defaults in China, especially on USD-denominated debt, including by major property developers.³ We believe the risk of systemic default risk, however, is limited given the structure of the property sector's debt and government efforts to help deleverage over past years. The outstanding debt is estimated to be CNY 60 trillion (USD 8.9 trillion), or nearly 50% of 2022 GDP.⁴ Of that, home mortgage loans account for 65% and corporate debt for 35%. The relatively high down-payments that homeowners need to make should help contain large-scale mortgage defaults.⁵ Meanwhile, nearly 70%⁶ of total corporate debt (~USD 3.1 trillion) takes the form of bank loans (see Figure 2), and the ratio of non-performing loans (NPLs) of commercial banks has been falling (1.61% by 3Q 2023 vs 1.96% in 3Q 2020, see Figure 3). The NPL ratio of listed mortgage-issuing banks stood at 0.5% by 1H 2023, aided by government deleveraging actions such as raising the age by which mortgages must be paid off to 70 from 65 years, and by promoting remortgaging at lower rates as PBoC rates come down. Homeowner and property developers' outstanding debts peaked in 2020 and by 3Q 2023 had declined to 30.8% and 13.0% of GDP, respectively.⁷ Lower rates globally should also ease financial pressures.

Figure 2: Value of property debt held by different entities, CNY trillion

Figure 3: Property sector leverage ratio (%) vs commercial banks' non-performing loan ratio (%)

In addition to deleveraging initiatives, the government has actioned policies to stabilise the property market. These include ensuring completion of pre-sale residential property to avoid mortgage defaults, lowering mortgage rates and down-payment ratios, and extending loan repayment terms for corporates. In its recent top leadership meeting, the government set economic growth as a priority for 2024. In this vein, we expect more fiscal spending, in coordination with monetary policy easing, and a deficit budget target of more than 3.5% (the highest since 2020 (3.6%)).⁸ With "three categories of major projects", the government has earmarked spending on affordable housing, urban village renovation and emergency public facilities. The aim is to provide housing for lower income households, and the fiscal  spending should also ease pressure on the commercial market over the longer term. It will also help restore consumer and investor confidence, and thereby support underlying economic growth. In insurance, it will present new premium opportunities in P&C, with engineering, commercial property and liability business set to benefit most.

This pdf edition of this Economic Insights also contains the crossword solutions from our Economic Insights Annual Compendium 2023.