[ET Net News Agency, 25 May 2018] Moody's Investors Service said that the property
market remains as central to China's economy as it did a year ago, largely through its
impact on downstream industries in the supply chain such as cement and steel production.
At the same time, Moody's sees some signs that Chinese economic growth is less directly
linked to investment in the property and construction sectors.
Moody's conclusions are contained in its just-released report "Property -- China: Growth
underpinned by households, constrained by regulations on credit supply".
"In March 2017, we identified four channels -- the supply chain, financial sector,
household sector and government finance -- that drive the potential impact of the property
market on China's macro economy," said Michael Taylor, a Moody's Managing Director and
Chief Credit Officer for Asia Pacific.
"Of the four, the supply chain remains the most important transmission channel to the
wider economy, with 25%-30% of China's GDP connected to demand from the property and
construction sectors," added Taylor.
"The exposure of the financial system has also increased over the past year, largely due
to the rise in mortgage loans issued by the formal banking sector and the increasing role
played by shadow banking in providing credit to the property sector," said Lillian Li, a
Moody's Vice President and Senior Analyst.
"However, tighter regulations for shadow banking are likely to restrict the supply of
credit to these borrowers, leading to some refinancing risk," added Li.
Household leverage increased faster in 2017 than during 2013-16, leading to a
deterioration in household liquidity. However, default risks remain low because of strong
income growth and still-large deposits. Housing affordability has also strengthened
In terms of government finance, regional and local governments still rely to a
significant extent on land sales as a revenue source, even as reliance on tax revenues
from the property and construction sectors has declined slightly.
At the same time, two factors continue to mitigate the macroeconomic effect of
developments in the property market. First, monetary and fiscal policy space continues to
provide a buffer against a possible correction in property prices; second urbanization
fuels continue demand for housing, reducing the risk of a sharp and prolonged correction.
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