Chinese developers pull back as property downturn hits economy

Thu May 8, 2014 5:04pm EDT
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By Clare Jim

SHANGHAI (Reuters) - China's efforts to cool its property sector look to have been more effective than intended, as a sharp drop in construction activity and falling prices threaten what had been one of few firing engines of the world's second-largest economy.

Developers know the market is struggling -- their inventory is rising and prices are falling -- but expect that authorities will relax their tight grip on the sector in coming months.

The government has long made it clear that economic growth would moderate as it tries to reform the economy. But by keeping the pressure on property too long, analysts fear the fallout will be more severe than anyone had expected.

"To us, it is no longer a question of 'if' but rather 'how severe' the property market correction will be," Nomura analysts said in a report.

New housing starts in the first quarter fell 25.2 percent compared to a year ago, Nomura calculated, as tighter credit conditions, oversupply and falling prices undermined the market.

They estimated the property slump could take a full percentage point off China's economic growth this year, knocking it below 7 percent for the first time since 1990. The government is targeting growth of about 7.5 percent.

The downturn really gained traction in late 2013 after more than four years of government efforts to tame record home prices and avoid an asset price bubble. Authorities also wanted to channel money towards consumption and productive investments.

"When sales slow and there are still inventories, the development momentum can moderate slightly; there's no rush,' said Adrian Chan, assistant to the chairman at Guangzhou R&F properties (2777.HK: Quote).   Continued...

A garbage collector walks past residential and office buildings in construction, in Hefei, Anhui province, April 3, 2014. REUTERS/Stringer