BEIJING — China’s struggling real estate sector could significantly drag down the economy and the stock market if authorities don’t provide enough support, Morgan Stanley analysts said in a report Wednesday.
The Shanghai composite has fallen by more than 12% so far this year. Several economists have slashed their China GDP forecasts to near 3% or less this year as Covid controls and the property slump weigh on growth — officially targeted at around 5.5% this year.
This summer, rising anxiety among homebuyers about apartment completion brought problems in the massive real estate sector — and worries about spillover to the rest of the economy — to the forefront again.
The Morgan Stanley analysts generally expect the Chinese government will quickly attempt to rescue the property industry, including a “sizeable” fund to help developers finish constructing apartments. That would allow housing sales and prices to stabilize in the second half of this year, the report said.
But if such a fund is too small and other measures remain limited, the analysts are less optimistic about the impact on China’s economy and stocks.
Here’s how bad they think things could get under a “stress-test scenario”:
- Chinese stock indexes could plunge by another 20% from current levels over the next six to 12 months — and potentially remain lower for much longer if the hypothetical stress scenario persists.
- China’s GDP could slow drastically, averaging 2% growth in 2023.
- More than 11 million people could lose their jobs, likely sending the urban unemployment rate above 7%. Construction, accommodation and catering would see the most job cuts.
The Chinese government has yet to announce publicly any kind of large-scale fund to support real estate developers in completing apartments.
On Wednesday, Premier Li Keqiang headed a meeting that did emphasize support for ensuring delivery of homes by saying local governments should take a flexible approach in providing special credit policies and special lending.
The Morgan Stanley analysts described policy easing to support housing demand as “the most aggressive since 2016” and pointed out local governments’ efforts to address unfinished houses.
“The silver lining is that the spillover [from real estate] to the rest of the economy remains manageable so far,” the analysts said. But they warned the housing market’s size and “the momentum that has gathered” make it unclear whether recent measures are enough.
A shrinking driver of growth
Even if the Chinese government can stabilize the housing market, an aging population is expected to reduce demand for apartments, putting the nationwide real estate industry on a downward path.
Morgan Stanley’s base-case forecast expects long-term demand for housing to decline by 30% between 2020 and 2030.
That would result in a 10% to 15% drop in demand for construction materials and housing-related purchases such as large home appliances, the report said.
Overall, a slowdown in the residential property market will drag down GDP growth by 0.1 percentage points a year, in contrast to adding 1 percentage point to growth annually over the last two decades, the analysts said.
Soaring household debt
Previously, China’s real estate market had boomed for two decades, resulting in speculative behavior and increased risks for long-term economic growth. Housing sales value grew by roughly 20% a year to 18 trillion yuan ($2.65 trillion) in 2021, or one-sixth of GDP, according to Morgan Stanley.
Among many consequences was that the ratio of household debt to GDP soared from 17% in 2005 to 62% in 2020 — similar to the level in major developed economies, the report said.
Beijing in the last several years started to promote a mantra of “houses are for living in, not speculation.” About two years ago, authorities cracked down on developers’ high reliance on debt for growth.
By the second quarter of this year, housing sales value was 40% below the peak on a seasonally adjusted, annualized basis — a drop of 8 trillion yuan, the Morgan Stanley report said.
The near-term outlook remains grim.
“The Covid lockdowns in 2Q22 exacerbated the housing downturn, by disrupting product completion, delaying debt restructuring meetings, while also weakening future income expectations,” the analysts said.
Earlier this week, Chinese developer Country Garden described the property market has having “slid rapidly into severe depression.”
— CNBC’s Michael Bloom contributed to this report.