China Property Market Beginning Collapse That May Hit Banks, Rogoff Says
By Susan Li and Jacob Greber
Jul 6, 2010
China’s property market is beginning a “collapse” that will hit the nation’s banking system, said Kenneth Rogoff, the Harvard University professor and former chief economist of the International Monetary Fund.
As China’s economy develops, “especially at the speed it’s growing, it’s going to have bumps,” said Rogoff, speaking in an interview with Bloomberg Television in Hong Kong. He also said that while recoveries across the global economy are “very slow,” the danger of a return to recession isn’t “elevated.”
Rogoff’s concern echoes that of investors, who sent China’s benchmark stock index to its worst loss in more than a year last week. China’s data have been a focus because the nation has led the global recovery from the worst postwar recession.
The Shanghai Composite Index tumbled 6.7 percent last week, recouping some of those losses today on speculation recent losses were excessive. The gauge was up 1.9 percent at 2,409.42 as of 3:09 p.m. local time.
In the U.S., the world’s largest economy, the benchmark Standard & Poor’s 500 index capped a ninth day of declines in 10 sessions on July 2 after a government report showed fewer private-sector American jobs were created in June than forecast.
Chinese authorities intensified a crackdown on property speculation after announcing the economy expanded at an 11.9 percent annual pace in the first quarter, the most since 2007. Measures have included raising minimum mortgage rates and down payment ratios for some home purchases. Officials may also start a trial property tax, according to state media.
The efforts have contributed to a slump in real-estate sales, while prices continue to climb. The value of property sales dropped 25 percent in May from the previous month. The increase in prices, at an annual 12.4 percent in May according to a government survey of 70 cities, was down from a 12.8 percent advance in April.
“You’re starting to see that collapse in property and it’s going to hit the banking system,” said Rogoff, 57, who also serves on the Group of 30, a panel of central bankers, finance officials and academics led by former Federal Reserve Chairman Paul Volcker. “They have a lot of tools and some very competent management, but it’s not easy.”
Premier Wen Jiabao’s government has been trying to cool the economy to alleviate the threat of asset-price bubbles. The central bank has told lenders to set aside more money as reserves, and targeted a 22 percent cut in credit growth at banks this year, to 7.5 trillion yuan ($1.1 trillion).
Economists at banks from Goldman Sachs Group Inc. to BNP Paribas SA and China International Capital Corp. have lowered their gross domestic product forecasts for China in recent weeks. Goldman last week cut its growth forecast for China this year to 10.1 percent from 11.4 percent because of the government’s monetary tightening measures.
Property prices will probably fall in some regions of China in about three months, said Xu Shaoshi, minister of Land and Resources, according to a Securities Times story yesterday. Values are now stagnant, Xu also said, according to the report.
Rogoff’s view clashes with that of Stephen Roach, chairman of Morgan Stanley Asia Ltd., who said last month the property boom isn’t a bubble. While portions of the market such as high- end apartments are overheating, residential demand will remain robust as rural Chinese migrate to cities, he said in a radio interview in Hong Kong with Tom Keene on Bloomberg Surveillance.
Standard Chartered Plc analysts forecast a drop in property prices of as much as 30 percent in China’s big cities in the second half of 2010 compared with levels of mid-April. Such a loss wouldn’t impair the banking system because values typically fluctuate much more in the country than in advanced economies, said Jinny Yan, an economist at the bank in Shanghai.
China’s financial regulator said June 15 that it saw growing credit risks in the real-estate industry, warning of increasing pressure from non-performing loans. Risks associated with home mortgages are rising and a “chain effect” may reappear in real-estate development loans, the China Banking Regulatory Commission said in its annual report.
The record credit expansion last year helped propel earnings at the nation’s lenders, with financial institutions reporting 668.4 billion yuan of combined profits in 2009, a 15 percent gain from a year earlier, according to the CBRC.
China’s five largest state-controlled banks have announced plans to raise as much as $54.5 billion of capital by selling bonds and shares after they extended record loans last year to support a government-led stimulus plan.
Agricultural Bank of China Ltd., which is in the midst of a $20.1 billion initial public offering in Shanghai and Hong Kong, told investors yesterday that real-estate loans are among the biggest risks facing the industry.
Weaker growth in China, as well as decisions by developed countries to tighten fiscal policy, may slow the global economic recovery, which Rogoff said is unlikely to slide into a so- called double-dip recession.
Rich nations will reduce their primary budget deficits, excluding interest payments, by 1.6 percentage points next year, the most since the Organization for Economic Cooperation and Development began keeping records in 1970, according to JPMorgan Chase & Co. economists. The budget squeeze will lop 0.9 percentage point off growth in 2011.
“The bad news is the recoveries are very slow,” Rogoff said. At the same time, “the fact that we’re not growing super fast, doesn’t necessarily say well therefore we’re about to enter something worse.”
In the aftermath of a financial crisis, “you don’t get a typical recovery” with a so-called “v-shaped” trajectory of surging output after a decline, he said.
By contrast, Nobel laureate Paul Krugman, a professor of economics at Princeton University, wrote in a June 28 column in the New York Times that the global economy is in a depression caused by a “failure of policy.” Krugman blamed governments for moving to reduce budget deficits rather than focusing on lowering historically high unemployment levels.
Rogoff reiterated his criticism of China’s exchange-rate policy, saying that the June 19 announcement of a resumption of “flexibility” in the yuan was a “master stroke” because it removed the issue from the Group of 20 summit later that month.
China’s history of counting on overseas demand to drive its development needs to change, and it’s unrealistic to expect its export growth will be maintained “at the pace it’s been doing,” Rogoff said. “It’s impossible. At some point they have to redirect their strategy” for economic growth, he said.