Property downturn deepens as lending slows across the board

What the latest evidence shows

The property market downturn in China has deepened in recent months, according to the World Bank’s China Economic Update. At the same time, bank lending growth has slowed to 6.4% year-on-year, reflecting weak credit demand from the private sector.

What is driving the slowdown?

Manufacturing and infrastructure investment have been affected by profit pressures and other factors, as per the World Bank. The slump in property has been a key drag, and bank loans have grown more slowly partly because private-sector demand for credit is soft. This context explains why lending is slowing across the board.

How might rate changes affect borrowers?

The World Bank also notes that interest rate liberalization could raise deposit returns for savers but, at the same time, expose borrowers to higher loan costs and greater risk. In other words, the environment is not straightforward for borrowers.

A broader view from other sources

Other reporting adds that China’s property crisis may not have hit bottom yet, with new home sales falling sharply since developers began defaulting on massive debts. Some analysts suggest the downturn has a ‘self-fulfilling’ nature, where developer debt troubles scare off buyers, hurting sales, which in turn worsens developers’ financial problems.

In response to the property slump, Chinese authorities have introduced substantial stimulus measures. These include lowering down payment ratios, cutting provident fund loan rates, removing commercial loan rate restrictions, and setting up a relending facility for local governments to buy unsold homes for affordable housing. These measures came after data showed new home sales and prices declining across cities.

Analysts comment that the stimulus measures are aimed at preventing a potential financial crisis from large developer failures, unlike earlier stimulus which focused on boosting demand. Some observers believe the strong policy action shows policymakers are learning from Japan’s lost decades and trying to avoid a balance sheet recession.

However, consumers in China have shown a firm belief that housing has become a losing investment, as property developers struggle and some buyers have faced difficulty getting loans. Regulators have taken steps to support developers, such as instructing banks not to abruptly cut off loans to troubled projects, but rather to provide longer repayment periods and new loans. Additionally, the central bank and financial regulators allowed some developers to use operating property loans from banks to repay other real estate loans or bonds.