The Swiss Re Institute has released an analysis on the ongoing downturn in China’s property market, asserting that the risk of a global financial contagion is contained.
Despite persistent concerns surrounding the potential spillover effects, the institute believes a broader financial crisis is unlikely.
The report highlights key factors contributing to the reassurance, emphasising that the majority of the property sector’s debt is domestically oriented and structured in a way that minimises the risk of systemic defaults.
The institute also notes government initiatives, including spending on “major” infrastructure projects and the prevailing lower global interest rates, as supportive measures for economic growth and the Property and Casualty (P&C) insurance sector.
While acknowledging that the property market’s downturn will continue to impact investment and consumption, the Swiss Re Institute underscores the limited likelihood of a broader financial crisis.
The government’s actions to deleverage the mortgage loan sector and the structuring of outstanding household and corporate debts are cited as mitigating factors against widespread defaults.
The analysis points to cyclical and structural factors driving the property market slump, including slowing income growth during the pandemic, a shrinking working-age population, diminishing returns on investments, and slower total factor productivity growth.
The impact on household and business confidence has contributed to a liquidity trap, affecting around 24% of the real estate-related value chains that make up China’s GDP.
The global interest rate hiking cycle of 2022-23 triggered defaults in China, particularly on USD-denominated debt, including major property developers.
However, the Swiss Re Institute believes the risk of systemic default is limited, given the debt structure and government efforts to deleverage. The outstanding debt in the property sector is estimated at CNY 60 trillion (USD 8.9 trillion), comprising 65% home mortgage loans and 35% corporate debt.
The report also highlights positive indicators, such as the falling ratio of non-performing loans (NPLs) in commercial banks and specific government actions, like raising the age for mortgage payments and promoting remortgaging at lower rates.
Homeowner and property developers’ outstanding debts, which peaked in 2020, had declined to 30.8% and 13.0% of GDP, respectively, by 3Q 2023.
In conclusion, the Swiss Re Institute anticipates that ongoing deleveraging initiatives and government policies to stabilise the property market will contribute to economic growth, albeit at a new lower norm.
The fiscal spending on “major projects” is expected to ease pressures on the commercial market, restore confidence, and present new premium opportunities in the Property and Casualty insurance sector, particularly in engineering, commercial property, and liability business.
