China’s $ 43 billion real estate sector, the backbone of the economy, is showing signs of deterioration as Beijing attempts to revive growth after the coronavirus epidemic.
Beijing wants to revive economic growth after one of its worst periods since the Cultural Revolution, which ended in the 1970s. The massive quarantines and restricted movement of hundreds of millions of people have caused contraction at record rates important economic indicators such as industrial production and retail sales this year.
Now that the number of new cases of coronavirus has decreased in China, officials in many parts of the country are pressing to get factories, home builders and other businesses back to work as quickly as possible. Authorities have announced that they will begin to ease restrictions on travel to and from Hubei, the central province of China where the epidemic began in January, starting on Wednesday.
Despite Beijing’s efforts, the housing market, which analysts say accounts for about 15% of the country’s gross domestic product, did not return to normal in March – and could even get worse.
China’s beige book property index showed a deeper contraction in sales volumes between February and March, contradicting the idea that the Chinese economy is returning to normal, as some official data indicate. The index is compiled through interviews with more than 3,300 companies and leaders, with results that often clash with government data.
“Real estate was devastated in the first quarter,” says the Beige Book report. “Each basic performance measure plunged deep into negative territory in both real estate and construction.”
The real estate sales volume index contracted by 11 points to -49 in March against -38 in February. A negative reading of the index indicates a contraction and a positive reading indicates an expansion in sales volume. The index includes sales of homes and commercial properties.
For the first quarter of 2020, the sales volume index showed a reading of -29, compared to an expansionary reading of 70 in the first quarter of 2019.
Data compiled by Barclays showed that home sales fell about 40% in March compared to the same period last year. The sharp drop indicates that the sector is starting to recover after a 70% drop in sales in February.
“In China, the new construction market is so important for volumes,” said Liam Bailey, director of research at Knight Frank in London. “Any distress in the housing construction sector will have a medium-term impact on delivery and therefore transactions.”
The turbulence in the Chinese real estate sector could lead to payment defaults by certain medium-sized developers and should have a significant knock-on effect on GDP growth this year.
According to a calculation by Capital Economics, gross domestic product for the first three months of this year will contract by around 20% from one quarter to the next. Barclays lowered its estimate of 2020 GDP growth to 1.3% from 5.8% before hatching.
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