China property crash risks $1 trillion hit to global growth
A Chinese property slump threatens to spark a contagion that could wipe $1 trillion off global growth, economists have warned.
UBS has estimated that a slowdown in China’s property market is likely to wipe 0.5 percentage points off the growth rate of the $95 trillion global economy, which the IMF predicts will advance by 4.9pc next year.
In the bank’s more severe downturn scenario, that figure could double, its economists Tao Wang and Arend Kapteyn said.
The warning from the investment bank’s latest global outlook comes as the woes of debt-laden Chinese developer Evergrande and a government crackdown on borrowing shake sentiment and spark concerns from regulators around the world.
Construction and property has been a key driver of Chinese growth and accounts for around a quarter of the world’s second largest economy.
China’s major trading partners who previously fed the boom with commodities and materials face the biggest blow, as growth slows by 0.3pp for every 1pp slowdown in the Chinese economy, UBS said.
Its report warned: “The main channel of contagion of China’s property downturn is likely through trade, especially imports of commodities (minerals and metals especially), as demand for construction materials, machinery, appliances and automobiles drops.
“Economies most exposed to China’s domestic demand are commodity producers including Chile, Australia and Brazil, and Asian economies including Vietnam, Malaysia, Taiwan and Korea.”
UBS warned of the “waning fundamentals” behind the Chinese market, which has been accelerated by Beijing’s “three red lines” imposing strict new limits on the balance sheet of developers.
Mark Williams, chief Asia economist at Capital Economics, said: “Property and construction can’t continue to grow at the pace that it has done over the past 10 years - the negative scenario is that you get a sudden drop-off, or there is a positive one where it is more gradual. There is not enough demand or people in China to support it as the population slows, the pipeline is not there.”
UBS estimates that a 10pc decline in Chinese construction could knock around 2.5pp off the growth rate of the economy overall.
The turmoil of the sector has also drawn the scrutiny of the Federal Reserve, which is concerned that the fallout could spread to the US.
Its latest financial stability report said that “stresses in China could strain global financial markets through a deterioration of risk sentiment, pose risks to global economic growth, and affect the United States”.
Evergrande, which is saddled with $300bn in debt, has launched a desperate fire-sale of assets to meet interest payments on its borrowings after missing an initial deadline last month.
The crisis has hammered investor sentiment and triggered the biggest sell-off in Chinese firms overseas dollar debt in seven months as the contagion spreads beyond property firms to companies such as internet giant Tencent.
