China's real estate crisis raises expectations of deflation

The risk of deflation in China is rising strongly. A report by China Beige Book International shows that demand for real estate is falling critically due to the ongoing crisis caused by Covid restrictions. This situation contrasts with other major economies.

The companies reported that the selling price growth has become very weak. Compared to the previous quarter, salaries and production costs slightly increased, but the decrease in selling price growth has continued since the last quarter of 2020 for the three months through September.

CBBI provides independent economic data. During the mentioned period it has questioned 4354 companies.

Leland Miller, CEO of CBBI said that almost everywhere in the world there is rising inflation, but in China there is a growing risk of deflation because of the destruction of Covid Zero.

According to the report, the real estate sector is providing much of the pressure by deflation. It is noted that retail and service sector prices increased in the third quarter. The lockdown in big cities like Shanghai and Jilin Province severely limited activity at the beginning of the year, but it was removed by the summer. However, other cities have been closed more recently, for example Chengdu.

In August, there was a decrease in housing prices. This drop is now in its 12th month. Homeowners also highlight other problems, from improper construction to noise pollution. In order not to bring situations to the point of a boycott, these complaints are compensated by mortgage payments, which compounds the property crisis.

The report on retail and service sector growth indicates that the results of the real estate sector are under intense attention and that brings some relief and is not worth the worry. But there is a possibility that winter could lead to more extensive quarantines, bring down retail and service price growth, and bring deflation problems to the headlines.

China's primary consumer price index rose by 2.5% in August. The reasons were the high cost of fuel and the continuing rise in pork prices. However, compared to previous months, growth slowed and core inflation (volatility in food and energy prices is not included) remained unchanged at 0.8%, the same as last month.

In an interview for Bloomberg TV, Miller said that the government has failed to implement policies to stimulate consumption in China, which means that the situation in the real estate market signals "a new era of much slower growth" for the country.

According to Miller, the main driver of China's growth is real estate. Without it, growth will be much slower, regardless of the situation with Covid. Rejection of the old growth model without immediately evident new growth drivers creates a very difficult situation.

The manufacturing industry also shows an alarming situation. This is reflected in the CBBI questionnaire. Compared to the April to June period and compared to the third quarter of 2021, the third quarter indicators decreased, including margin of profit and selling prices.

Since the second quarter, retail trade and services have shown a recovery in these indicators, although they have remained below 2021 levels.

The People's Bank of China is already implementing monetary easing policies, but they have not yet had a significant impact on companies. This is confirmed by the continued reduction in corporate loan activity in the third quarter. Corporate loans are measured by the CBBI indicator, which has fallen to its lowest level since the beginning of data collection in 2012. Company bond issues are measured by another indicator, which has fallen to its lowest level since 2016.