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China’s national property bubble driving down growth momentum to lowest of all emerging economies

With rumours of a Chinese national property bubble set to imminently burst, and continued negative growth figures, Maarten-Jan Bakkum (pictured), Senior Emerging Market Strategist at ING Investment Management (ING IM) offers his views on this country’s rapidly declining outlook.

In our quant screens, China currently has the weakest growth momentum of all emerging economies. In particular sales and price dynamics in the real estate sector continue to be outright negative. After the double-digit sales growth declines in Q1, April numbers are still bad. For Beijing and Shanghai, sales volumes declined by 18% and 17%, respectively, in the first three weeks of April.

This sharp decrease in real estate sales does not bode well for investment in property, or the wider Chinese economy, where this sector represents 20% of GDP. We expect property price dynamics to deteriorate more in the coming months.

This decline, combined with modest policy easing and the Purchasing Manufacturing Index (PMI), which remained far below the neutral 50 mark in its April flash reading, suggests Chinese growth prospects remain poor.”

In addition, domestic demand continues to struggle and the Chinese current account surplus continues to shrink. This confirms the poor performance of the export sector. In Q1, the surplus was only USD7 billion, compared with the USD46 billion quarterly average in 2013.

Further issues, such as problems in China’s export sector and the large gap in the real effective exchange rate of China relative to the emerging market average are likely to drive weakening of the renminbi.

As an asset class, we are medium overweight on real estate. Fundamentals remain firm almost everywhere in developed markets and non-residential real estate has started to pick up in light of a better economic outlook. The recovery started in the US but today also the UK, Germany, Japan and, more recently, other parts of core and peripheral Europe are improving in terms of house prices, home sales and unemployment dynamics. However, Chinese real estate on the other hand sees its prospects deteriorating.

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