China Will Not Be Able To Offset Its Property Bubble Easily

No economy has been able to ignore a property bubble and even less so offset it and continue to grow replacing the bust of the real estate sector with other parts of the economy.

According to The Guardian, "China's real estate market has been called the most important sector in the world economy. Valued at about $55tn, it is now twice the size of its US equivalent, and four times larger than China's GDP". Considering construction and other real estate services, the sector accounts for more than 25% of China's GDP. Just to consider other previous examples of property bubbles, the average size of the sector was somewhere between 15 to 20% of a country's GDP. And none of those economies managed the excess of the property sector.

Of course, the problem of a real estate bubble is always excessive leverage.

These three factors mean that it will be impossible for China to contain a bubble that is already bursting.

With high leverage, prices that have risen massively above real GDP and real wages, and a population that is heavily exposed to the sector, the impact on China's economy will be much more than just financial.

Even if the PBOC tries to disguise the fiscal impact with liquidity injections and bank direct and indirect bailouts, the real estate bubble is likely to hit consumption, utilities that have built infrastructure around empty buildings, services and sectors that manufacture parts for construction.

The Chinese government may contain the financial implications, but it cannot offset the real estate sector impact on the real economy.

https://www.dlacalle.com/en/china-will-not-be-able-to-offset-its-property-bubble-easily/