China property oversupply dampens growth outlook

BEIJING (Reuters) - Growth in China’s property investment slowed over January to July, even as the government scrambled to balance an increasingly stratified sector, clouding the outlook for China’s economic expansion in the second half of the year.

Property investment in January-July rose 5.3 percent from a year earlier, data from the National Bureau of Statistics (NBS) showed on Friday, slowing from an increase of 6.1 percent in January-June, while property sales by floor area grew 26.4 percent, down from 27.9 percent.

Some analysts believe an oversupply problem still remains largely unresolved, especially in China’s smaller cities.

“Today’s data shows that a nation-wide oversupply problem still exists, which will continue putting downward pressure on future growth,” Wendy Chen, macroeconomist at Nomura told Reuters.

China’s property sector had a hot start to the year after slowing in 2015, as monetary easing and stimulus measures took effect.

However, the upward trend in investment and sales is proving to be unsustainable, as more first and second tier cities adopt stiffer measures to dampen fast-rising prices, while smaller Chinese cities struggle to clear overhanging housing inventory.

Home price gains also have started to slow, as cities start to tighten policies amid signs of overheating in the largest cities.

With property investment growth losing momentum and private investment growth remaining stubbornly sluggish, China’s economic growth outlook for the second half looks increasingly gloomy.

“China’s property sector is extremely unbalanced, which leads to more control in overheated first and second tier cities while less developed third and fourth tier cities are struggling to clear inventory,” said Liao Qun, chief economist at CITIC Bank International.

Real estate investment directly affects about 40 other business sectors in China and is considered to be a crucial driver for the economy.

A stronger housing market helped China’s economy stabilize at 6.7 percent growth in the first half of the year, but a slowdown in the sector could put a damper on that growth.

“The challenge is how to increase demand in third and fourth tier cities, which particularly suffer from an alarmingly high inventory, by encouraging and facilitating more people to settle there instead of the more developed cities,” Chen said.

However, some analysts predict China’s housing demand will remain robust for years to come.

Fitch Ratings said China needs to build residential property space roughly equivalent to the land area of Singapore, or 800 million square meters, every year until 2030.

A big challenge is a lack of land for development, especially in the big cities, with nationwide new land supply for construction falling 27.4 percent in 2015 from the year before.

For July, property investment growth cooled to 1.4 percent from a year ago, according to Reuters calculations, compared with 3.5 growth percent in June.

The property sector grew 9.1 percent in the first quarter of the year, but slowed to 8.8 percent growth in the second.

New construction starts in July were up 8.1 percent from a year ago, measured by floor area, Reuters calculations showed, compared with 4.9 percent in June.

Inventory by floor area last month grew by 7.7 percent from a year earlier, compared to 8.6 percent in the previous month. The growth rate has been moderating for a consecutive five months since January this year.

Reporting by Yawen Chen and Sue-Lin Wong; Editing by Eric Meijer