CASS: China's Property Bust Could “Fatally Impact” the Economy

A dramatic fall in China’s real estate market could have disastrous effects on the economy, according to one of the country’s top social researchers. The deputy director of the Chinese Academy of Social Science issued the warning on Monday, at the release of its 2012 Blue Book on China’s Society. Li Peilin said real estate development around China is now closely tied to each region’s economic development, and if the market collapsed, it would "have a fatal impact on the economy."

Professor Frank Tian Xie from the University of South Carolina-Aiken agrees.

[Frank Tian Xie, University of South Carolina Aiken]:
"It is entirely possible for the economy to be rocked by a sudden fall in home prices. That’s because new homes, those on the market and those being developed are all financed through mortgages, and through investment by state-owned banks. If property prices fall, and the debts go bad, it’ll drag down the financial system."

For China’s local authorities, land and property sales can account for more than 50% of their income. And while a tightening of the market is needed, economist Qi Yancheng says a drop in land revenues will no doubt hurt their pockets.

[Qi Yancheng, Economist]:
"The fall in property prices will most likely directly impact the land finance and governance of local governments. A drop in things like sale proceeds, income generated through construction, and land taxes will all affect their income."

The Chinese regime has been forced to cool the property market in recent months, after prices hit record highs last year. Those strategies appear to be working, with the National Bureau of Statistics reporting on Sunday that property prices across 70 major cities fell in November. While the trend is expected to continue, its severity and impact on the economy remains to be seen.