April 28 (Bloomberg) --China’s real-estate market is a “particular source of risk” to growth given the importance of property construction to the world’s second-biggest economy, the World Bank said.
“Shocks to the property sector that would slow down construction significantly could have a large impact on the economy and on bank balance sheets,” the Washington-based lender said in its China Quarterly Update released in Beijing today. “A property downturn could affect the finances of local governments which do a lot of the infrastructure investment.”
Regulators told China’s banks last week to conduct more stress tests on their real-estate lending as the government steps up efforts to curb surging housing prices. A potential rise in bad debts on property loans and credit to local government financing vehicles risks triggering another state- funded bailout, Fitch Ratings said this month.
“With tension between the underlying upward housing price pressure and the policy objective to contain price rises, interaction between the market and policy measures could lead to a more abrupt than planned downturn in the real-estate market,” according to the report.
The bank today lifted its growth forecast for the world’s fastest-growing major economy to 9.3 percent this year from a 9 percent forecast made last month due to faster-than-expected growth in the first quarter. It also raised its inflation estimate to 5 percent from 4.7 percent.
Commodity-Price Shocks
“It is too early to stop the macro tightening”, the bank said. While food-price gains appear to have peaked, and its inflation forecasts “are not particularly worrying, the risks, including from further global commodity price shocks, call for vigilance,” according to the report.
Currency appreciation would help the government curb increases in prices by easing pressure from imported inflation, World Bank economists said today. Consumer-price inflation has exceeded government targets every month since July.
Yuan appreciation is a “pretty direct tool” and should be part of a broader arsenal to combat inflation, Ardo Hansson, the World Bank’s lead economist for China, said at a briefing in Beijing today.
Record Yuan
“The theoretical case and empirical evidence of the role of the exchange rate in these kinds of matters is so overwhelming that it shouldn’t really be an issue of debate,” said Louis Kuijs, the bank’s Beijing-based senior economist said at the same briefing.
The yuan rose to the strongest level in 17 years, touching 6.5015 per dollar in Shanghai today, according to the China Foreign Exchange Trade System.
The government should allow interest rates to play a larger role in macroeconomic policies to cut reliance on quantitative measures, such as lending quotas and reserve ratio requirements, the bank said in its report.
Property companies including Poly Real Estate Group Co., the nation’s second-largest developer by market value, declined in Shanghai trading today amid the fifth straight daily drop in the benchmark index on speculation the government will increase interest rates. The Shanghai Composite Index closed 1.3 percent lower at 2,887.04.
Housing Curbs
Premier Wen Jiabao has ordered local governments to cap gains in new-home prices after curbs on mortgage lending, higher down payments and limits on purchases failed to stem increases. The government is studying rules to control developers’ profits to keep prices at a reasonable level, the China News Service reported yesterday. China also plans to build 36 million units of social housing over the next five years.
Growth in the prices of new homes slowed in Beijing and Shanghai in March, a statistics bureau report showed last week, as the government intensified property curbs. Of the 70 cities monitored in the survey, 67 posted gains, down from 68 in the first two months, the report showed.
Real estate “is not a sector that can be fine-tuned as easily,” Hansson said. The industry has been subject to many policy actions and there will be “long, variable lags” for the effects of government measures to become fully apparent.
The World Bank cut its projection for China’s current account surplus to 3.6 percent of gross domestic product this year, from its November prediction of 5.3 percent, citing higher commodity prices that affect the country’s trade pattern “substantially.”
China’s foreign-currency reserves rose by $197 billion in the first quarter, the second-highest on record, boosting its total holdings to more than $3 trillion even as the nation reported a trade deficit in the Jan. to March period.
The gains “don’t suggest large hot money inflows” because capital controls make it “not easy to bring into China dozens of billions of dollars”, Kuijs said. The increase is more likely related to some “ad-hoc” bank transactions or increased offshore settlement of trade in yuan, he said.
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