By Gabriel Crossley

BEIJING, (Reuters) – China’s main driver of economic growth has slowed sharply in recent years as Beijing clamps down on speculators, indebted developers, and other financial risk takers. Prices of new homes have fallen for the first six years.

Analysts believe that authorities will stabilize this sector which contributes 25% to gross domestic products in the immediate term. But, it is uncertain which policies Beijing would use.

Authorities must address multiple issues, including debt risks, rising costs of living, anxious homeowners and the urgent need for economic growth.

DEBT RISKS

The primary motivator of this crackdown is concern over increasing financial risk.

China’s real estate sector heavily depends on credit. Nomura estimates that Chinese developers owe 33.5 trillion Yuan ($5 Trillion) as of the third quarter.

Since authorities last year unveiled the “three red lines” – a significant policy plank aimed at limiting developers’ liabilities-to-assets, net debt-to-equity, and cash-to-short term borrowing ratios – many companies have grown desperately short of cash.

GRAPHIC: Cost of housing in China’s big cities far outstrips incomes https://graphics.reuters.com/CHINA-ECONOMY/xmpjoldbdvr/chart.png

A series of late offshore payments, as well as sell-offs of shares and bonds, followed. China Evergrande Holdings was the most indebted development company in the world, and it continued to drift towards default.

Analysts and banks agree that Beijing won’t relax its policy of “three red lines,” according to analysts.

COST OF LIVING

To discourage speculative buying of homes, authorities have placed lending restrictions on mortgages.

China’s largest cities are home to some of the most expensive real estate worldwide, compared with average incomes.

For someone earning a regular salary in these cities, it would require decades of savings in order to rent an apartment in Beijing or Shanghai.

GRAPHIC: China tier one city house prices https://fingfx.thomsonreuters.com/gfx/ce/jnpwexrybpw/ChinaTier1CitiesPriceOct2021.png

People who live in megacities will eventually have to return home or relocate to cheaper cities inland. Some young people have chosen to live a passive life, known as “lying down,” due to rising costs of living.

President Xi Jinping pledged to lower inequality and make housing affordable for people, not just speculation.

GRAPHIC: China’s households put their wealth in real estate https://graphics.reuters.com/CHINA-ECONOMY/akpezmyglvr/chart.png

According to Reuters, this was the first drop in prices for new houses since 2015.

INTERESTS OF HOMEOWNERS

Analysts believe that the concerns of many millions of homeowners will act as a significant brake to government policies to cool down the sector.

About two thirds of China’s wealth, which amounts to 1.4 billion people, is invested in residential property. The highest rate of homeownership in the world is 90%, which means that more than 90% of urban households have their own home.

Expectations of sustained growth by the government and strong social pressure to purchase homes before marriage fuel buying.

GRAPHIC: China’s real estate sector has global weight https://graphics.reuters.com/CHINA-PROPERTY/znpnekqkgvl/chart.png

As China tries to weigh the benefits and risks of reforms, there are concerns that China will experience a sudden slowdown.

GROWTH PROBLEMS

Regulations could also be limited by growth concerns.

According to analysts, property and its related industries make up about 25% of China’s GDP. These sectors drive demand for metals like steel, cement, or other resources.

The pace of GDP growth this year is already slowing, falling to 4.9% from 18.3% in Q1.

GRAPHIC: China GDP by sector https://fingfx.thomsonreuters.com/gfx/ce/zgvomklbyvd/ChinaGDPbyProductionType.png

An additional significant economic downturn may have global ramifications.

An Oxford Economics analysis has shown that if China follows its 2014-2015 property slump, the global GDP growth rate could drop 0.7 percentage points in the third quarter of 2022. This would lead to metal and iron prices falling.

China could see its GDP growth fall to 1.0% within the first three months 2023 and take a significant hit globally.

According to the Oxford analysts, “The most affected countries are those whose exports to China have a high priority and who export commodities to China.”