China is currently in a painful rebalancing where it needs to continue to wean itself off the reliance on housing as a structural demand driver and instead transition into an economy, where private consumption and high-tech manufacturing are the main drivers. Chinese leaders seem increasingly willing to pay a price to growth in the coming years from the lower levels of activity in the housing sector in order to achieve this rebalancing and get more capital allocated to more productive parts of the economy, not least high-tech manufacturing. The challenge is, though, to avoid that the decline in housing is so steep that it pulls down the consumer and investments with it. This is the risk China is currently facing and why we expect somewhat stronger measures to lift housing from the current depressed levels but not being so strong that they risk creating a new bubble.
As we wrote about in China holiday wrap-up – part three: risks of a financial crisis resurface, 14 August, financial stress has increased lately with another major developer, Country Garden, at brink of default and contagion to the shadow banking system increasingly visible. On top of this economic data has disappointed across the board with both consumer spending, home sales and exports undershooting expectations. Taking these developments into account we revise down growth to 4.8% this and 4.2% next year.