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Comment: Fears Of A Japanese-Style Property Crash In China Are Probably Wrong

Tom Burroughes

18 January 2012

The pace of economic growth in China has decelerated from recent red-hot levels and fears about a Japan-style property crash occurring in the world’s second largest economy are probably unwarranted, although not all risks have subsided, according to Signature, the investment firm.

The Chinese authorities have taken several steps to cool property prices and “tame the rampant speculation that was emerging”, achieving some measure of success, argues Andrew Morris, managing director at Signature, a discretionary investment manager and part of UK firm Rowan Dartington.

“That said, one should be very alert to the dangers and the long-standing after-effects of property market crashes. In addition, in spite of the Chinese government’s significant wealth we should certainly not underestimate the importance of property revenues for regional governments and in this respect reports of failed land auctions are worrying,” he said.

Concerns that China might suffer the same kind of massive falls in property prices as in the case of Japan in the late 1980s and early 1990s have concerned investors, observing that Japan's banking sector suffered brutal losses, and a decade and more of stimulus packages and low interest rates failed to reignite that country's once-legendary high economic growth.

China's GDP growth slowed to 8.9 per cent in the last three months of 2011, compared with a year earlier, latest figures show, adding to impressions that the Asian giant is experiencing some cooling of growth. Banks such as JP Morgan have predicted that GDP growth will record a rise of 7.2 per cent in the first quarter of this year from a year before. As a measure of expected weakening growth, the Shanghai Composite Index dropped by 21 per cent last year (source: Dow Jones).

Morris outlined his views over what he said will be a “hugely important” year for China (The Year of the Dragon in the country’s calendar). 2012 will see the start of the planned handover of power of the roles of president, prime minister and Communist Party general secretary to the next generation of leaders.

“Having experienced the best part of three decades of growth averaging around 10 per cent per year, it is inevitable that growth will slow as the economy matures. The new leaders must step up efforts to rebalance it away from a dependence on exports and investment to one that is more consumption orientated, not least because of the malaise of the West and the associated dampened demand for Chinese goods,” Morris said.

“This will not be an easy task, particularly in a country with such an uneven distribution of wealth. Following a decline in the inflationary pressures that have dogged the economy, there is now some scope for authorities to begin to ease policies and start to stimulate the economy, and indeed this has already started to happen,” Morris added.