China’s property bust holds lessons for India

Source: The post is based on an article “China’s property bust holds lessons for India” published in The Business Standard on 13^th September 2022.

Syllabus: GS 3 – Industries and industrial policy

News: Decline of China’s property market has become a serious concern for it. It also holds important lessons for India.

One of the reasons for the decline of property market in China is limiting the leverage to it. The step has been taken by Chinese government to protect the financial system.

What are the current situations of the private property markets in China?

The real estate sector has been one of the major growth drivers for the Chinese economy over the last decade. But the property sector has seen the steepest decline in over 30 years.

Sales in China’s property market is stuck at 80 per cent of the pre-pandemic levels and show no signs of picking up.

Covid pandemic and government strict credit measures also declined private property markets. Property sales in China this year are the lowest level since 2015.

The majority of apartments in China are built on a pre-sell model by developers. But this model has failed due to lack of confidence among buyers. Buyers have lost faith in the developers that they will complete projects or deliver apartments.

These financial problems have forced developers to suspend construction activity and stop new projects.

Still, Chinese economy has grown due to exports and infrastructure spending despite the decline in the real estate sector.

However, the present economic situation of China will not help it to achieve the 5.5 per cent target set for 2022.

What will be the consequences of slowing property markets in China?

The commodity prices will be impacted in China if construction continues declining.

There will be the divergence of monetary policy between China and most of the developed world.

For example, now the US and EU are tightening policy and financial conditions to fight inflation while China is cutting rates to increase property markets and stabilize its economy.

The US Treasury bond yields are now higher than Chinese government bonds and this yield gap will only grow in the future which will weaken the Chinese currency.

A weakening Chinese currency will put pressure on other emerging market (EM) currencies and no country would like to lose competitiveness to China.

What is the current real estate market situation in India and what lesson India can learn from China?

It suggests how much the real estate sector can be a stimulating factor for the economy and how much it can slow down the economy if it is not working well.

For example, after IL&FS crisis Real estate sector in the India was deprived of funding increasing defaulting builders and real estate NPAs.

However, the real estate in India is booming now due to various reforms brought by the government.

Therefore, India should also focus on the real estate sectors with proper reforms and credit access in the future.