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Chinese stocks could plunge if real estate gets worse

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Concerns about the problems of China’s large real estate sector, and the implications for the economy as a whole, have once again come to the forefront as homebuyers’ growing anxiety over apartment completions this summer.

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BEIJING—Morgan Stanley analysts said in a report on Wednesday that if China’s property sector is struggling, it could drag the economy and stock markets down significantly if authorities don’t provide enough support. .

The Shanghai Composite Index is down more than 12% so far this year. Some economists have cut their forecasts for China’s GDP this year to near or below 3% as Covid controls and a slump in real estate weigh on growth.The official target for this year is around 5.5%. .

this summer, Increased anxiety among homebuyers over condominium completion Worries about spillovers to other parts of the economy have again come to the forefront, posing problems for the large real estate sector.

Morgan Stanley analysts generally expect the Chinese government to try to rescue the real estate industry quickly, including with “substantial” money to help developers build apartments. Home sales and prices will stabilize in the second half of the year, the report said.

But if such funds are too small and other indicators remain limited, analysts are less optimistic about the impact on the Chinese economy and stocks.

Here’s how they think things will get worse under the “stress test scenario”.

  • China’s stock indices could plunge another 20% from current levels over the next 6-12 months and remain low for an even longer period if hypothetical stress scenarios persist.
  • China’s GDP could slow significantly, averaging 2% growth in 2023.
  • More than 11 million people will be out of work, and urban unemployment could exceed 7%. Construction, accommodation and catering will see the most job cuts.

The Chinese government has yet to announce a large-scale fund to help property developers complete apartments.

On Wednesday, Premier Li Keqiang led the meeting, Emphasis on reliable home delivery support Local governments should take a flexible approach in offering special credit policies and special loans, it said.

Analysts at Morgan Stanley described easing policies to support housing demand as “the most aggressive since 2016,” pointing to efforts by local governments to deal with unfinished housing.

“The ray of hope is the spillover [from real estate] But analysts cautioned that it was unclear whether the recent measures would be enough given the size and “gaining momentum” of the housing market.

shrinking growth drivers

Even if the Chinese government manages to stabilize the housing market, Demand for condominiums is expected to decline due to the aging populationput the nation’s real estate industry on a downward path.

Morgan Stanley’s base-case forecast sees long-term housing demand decline by 30% between 2020 and 2030.

As a result, demand for home-related purchases such as construction materials and large appliances will fall by 10-15%.

Overall, the slowdown in the residential real estate market will reduce GDP growth by 0.1 percentage points per year over the past 20 years, compared with a 0.1 percentage point decline in GDP growth per year, analysts say.

Soaring household debt

Previously, China’s property market experienced two decades of rapid growth, resulting in speculative behavior and increasing risks to long-term economic growth. According to Morgan Stanley, home sales are up about 20% a year, and by 2021 he will reach 18 trillion yuan ($2.65 trillion), or one-sixth of his GDP.

As a result of many, the ratio of household debt to GDP has surged from 17% in 2005 to 62% in 2020. This is similar to the level of major developed countries.

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