China’s real estate downturn most likely contained – Swiss Re

The prolonged downturn in China’s real estate market since February 2022 has sparked concerns about a potential financial crisis with global repercussions. However, as the industry enters the new year, Swiss Re forecasts that such a crisis appears unlikely.

Analysts point to several factors mitigating the risk, including peaking real estate debt levels, government policies to deleverage, and fiscal spending on key projects. These measures are expected to stabilize the property market and, in turn, bolster consumer and investor confidence, leading to economic growth at a new, albeit lower, norm. This stability could also positively impact China’s property and casualty (P&C) insurance sector.

The property market’s decline has been attributed to a combination of cyclical factors like slowed income growth during the pandemic and structural issues such as the shrinking working-age population and diminishing returns on investments. This slump has dented household and business confidence, curbing domestic growth and raising the risk of a liquidity trap.

The real estate sector’s troubles have since rippled through the economy, impacting investment and consumption and affecting approximately 24% of real estate-related value chains that contribute to GDP.

China’s GDP forecasts

The forecast for China’s GDP growth in 2024 is 4.5%, with reduced real estate investment expected to shave off 0.5-0.7 percentage points. The global interest rate hikes in 2022-23 led to defaults in China, especially on USD-denominated debt. However, the risk of systemic default is considered limited due to the nature of the property sector’s debt and government efforts to manage deleveraging.

The outstanding debt in the sector is estimated at CNY60 trillion, or nearly 50% of 2022 GDP, with home mortgage loans and corporate debt constituting significant portions. The relatively high down payments required for mortgages and most of the corporate debt being in the form of bank loans suggest a containment of large-scale defaults.

The government’s policies to stabilize the property market, including ensuring completion of pre-sold residential properties, lowering mortgage rates and down-payment ratios, and extending corporate loan repayment terms, have been instrumental. The government’s priority on economic growth for 2024 indicates more fiscal spending, alongside monetary policy easing. Plans include significant investment in affordable housing, urban village renovation, and emergency public facilities, aimed at supporting lower-income households and easing pressure on the commercial market.

This fiscal spending and policy support are expected to restore confidence in the market and underpin economic growth. In the insurance industry, these developments present new premium opportunities, particularly in engineering, commercial property, and liability business, within the P&C sector.

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