Published December 3, 2008

Property slump in China threatens global growth

Building sector, the biggest driver of China's growth, employs 77m people

(SHANGHAI) House prices in Shanghai, Shenzhen and Guangzhou are plunging, and the global economy may grind almost to a halt next year because of it.

Construction of homes, offices and factories fell at least 16.6 per cent in October after rising 32.5 per cent a year earlier, according to Macquarie Securities Ltd. That's squeezing an economy already slowed by recessions in the US, Japan and Europe that have cut demand for exports. Building is the biggest driver of China's expansion, contributing a quarter of fixed-asset investment and employing 77 million people.

The central bank cut its key interest rate by the most in 11 years last week and the government said 'forceful' measures were needed to arrest a faster-than-expected economic decline. Without more rate cuts and government spending, China is unlikely to contribute the 60 per cent of global growth Merrill Lynch forecasts for next year, further slowing the world economy.

'China is now at the heart of the global slowdown,' said Jim Walker, chief economist at Asianomics Ltd, an economic advisory firm in Hong Kong. 'It means that global growth is probably going to be dragged down close to zero next year.' Mr Walker, voted best regional economist in an Asiamoney magazine brokers' poll for 11 years through 2004 when he worked for CLSA Asia Pacific Markets, estimates China will grow zero to 4 per cent next year, with a 30 per cent chance of a contraction.

In 2005, China vaulted past the UK to become the world's fourth-largest economy, after expansion averaged 9.9 per cent annually for the previous 30 years. GDP has increased 69-fold since Deng Xiaoping began free market changes in 1978. China accounted for 27 per cent of global growth last year.

'The real estate sector has seen a particularly pronounced slowdown,' said Louis Kuijs, a senior economist at the World Bank in Beijing. 'Real estate investment growth is now close to zero.' China's export orders and output shrank in November by the most since records began as the global financial crisis sapped demand for the nation's toys, textiles and computers.

Exports and property together have contributed about half of the expansion in China's GDP, estimates Shanghai-based Andy Xie, an independent analyst who was formerly Morgan Stanley's chief Asia economist.

'That growth is gone,' he said. 'Can the government make it up with something else? It's going to be tough.'

Merrill's forecast of 1.5 per cent global growth next year is based on an 8.6 per cent expansion in China. The prediction on Nov 21 came 12 days after China announced a 4 trillion yuan (S$888.6 billion) stimulus plan, mostly for public works projects.

The government is trying to limit fallout from the slowdown for fear that rising unemployment may lead to social unrest. Police and security guards last week attempted to break up protests by fired workers in Guangdong province.

A second stimulus package to boost consumption may be imminent, the Beijing-based Economic Observer reported on Nov 24. Measures being considered include raising income-tax thresholds, higher salaries for state workers and increased subsidies for low-income groups, the newspaper said, citing people involved in discussion of the plan.

Shanghai house prices fell 19.5 per cent in the third quarter from the previous three months, according to real estate broker Savills. Declines in apartment values are accelerating in Shenzhen and Guangzhou, two of the fastest growing cities in Guangdong province, which produces 30 per cent of China's exports.

Construction will contract 30 per cent next year after expanding 9 per cent in the first three quarters of 2008, according to Macquarie Securities.

'The global financial crisis won't get China to zero per cent growth and neither will recession in developed economies,' said Tao Dong, chief Asia economist at Credit Suisse in Hong Kong. 'If there's a collapse in the property market that might do the job.' - Bloomberg