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Announcement:

Moody's: China's economy faces heightened risks from a potential future property downturn

 The document has been translated in other languages

29 Mar 2017

Hong Kong, March 29, 2017 -- Moody's Investors Service says that China's economy would face heightened risks from a potential future property downturn compared to when Moody's previously analyzed the macroeconomic importance of the country's real estate sector in 2014.

At the same time, the scope of the Chinese authorities for mitigating such an impact through fiscal and monetary policy has become more limited.

Moody's conclusions were contained in a just-released report on real estate in China, "Economy At Higher Risk From Potential Property Downturn".

"Around 25%-30% of China's GDP are connected to final demand from the property and construction sectors," says Michael Taylor, a Moody's Managing Director. "This creates the potential for developments in the property market to have large macroeconomic effects."

"We previously discussed four potential transmission channels through which a property market downturn in China could have broader macroeconomic implications: supply chain linkages; impact on the banking sector; wealth effects; and impact on government finances," adds Taylor.

"While the supply chain -- involving, for example, manufacturing for nonmetallic minerals and metals, construction, autos and power utilities -- remains the most important transmission channel, the potential impact through the banking system and wealth effects has gained in importance," says Lillian Li, a Moody's Vice President and Senior Analyst.

"Wealth effects have now gained in significance since 2014 as the share of property in total household assets increases," says Li.

"Previously, the banking sector's exposure to the property market was relatively modest, thus limiting the potential negative impact from a real estate downturn, but the rising share of mortgages in new bank credit, the risk from property pledged as collateral on other loans, and the increasing role of shadow banks as providers of finance to the property sector have all raised the financial system's vulnerability to a property-related shock," adds Li.

Moody's says that unlike in 2015, when the authorities responded with vigorous stimulus in reaction to developments in the property market, some recent trends will constrain policy space in the future.

Broad monetary policy support may be less available than in the past since monetary easing could exacerbate the challenges the authorities face in stemming capital outflows.

Although fiscal policy might be used to cushion any economic impact from a property market downturn, the government's ability to use this measure in future also appears to have become more constrained.

The central government's fiscal balance has deteriorated and, in the near future, Moody's expects that a proactive fiscal policy will increase its deficit to ~3.3%-3.5% of GDP over the next a few years. Chinese general government leverage, now standing at 36.7%, is no longer low relative to the median for China's rating peers.

However, Moody's notes that urbanization continues to support overall growth in the property market, although divergence is evident at different tiers of cities. Moreover, household affordability has slightly strengthened, underpinned by the strong growth in household income.

Subscribers can read the full report at:

http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1062868

The report may also be found through Moody's topic page "China's Trilemma: Growth, Reform and Stability", available at http://www.moodys.com/chinarebalancing. This page provides a centralized source for Moody's research related to key credit issues in China as the country's macroeconomic story continues to unfold.

Recent Moody's publications relating to China's Trilemma include:

• Banks -- China: Mid- and Small-Sized Banks' Higher NCD Levels Pressure Profitability, Widen Funding Mismatches

• Auto ABS -- China: Delinquencies Will Remain Low Through 2017 after Declining in Q4 2016

• China's Coordinated Approach to Regulating Investment Products Would Be Credit Positive for Banks

• Default Report: Default Rate for Asian Non-Financial Corporates Expected to Remain Low in 2017

• Coal -- China: Government Measures Will Drive Coal Prices Lower but Strong Enough to Support Miners' Credit Profiles

• Rated High-Yield Non-Financial Companies -- China: Most Companies Could Manage 10% Renminbi Depreciation vs US Dollar in 2017

• Securitization -- China: Sector Update -- Q4 2016: Auto ABS and RMBS Performing Well as Issuance Grows

• China Government: Local Government Incentives Hinder Central Government Reform Agenda

• Quarterly China Shadow Banking Monitor

• Life Insurance -- China: Credit Profiles under Pressure from Shifting Investment Allocation

Please find link below for further reference.

A Property Downturn in China Would Exert A Marked, But Manageable Economic Impact, published on 30 July 2014

http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_171774

Outlook Update: Property - China: Outlook Is Stable; Rising Risk of Slower Sales from Tighter Controls, published on 31 October 2016

http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1047943

China Credit: Sustained Capital Outflows Constrain Policy and Pressure the Currency, but Companies Largely Resilient, published on 13 March 2017

http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1056454

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Michael Taylor
MD-CCO APAC
Credit Strategy and Standard
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Lillian Li
Vice President - Senior Analyst
Credit Strategy and Standard
JOURNALISTS: +86 21 2057 4020
SUBSCRIBERS: +(852) 3551 3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

No Related Data.
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