Goldman with a note on how China is targeting the epicentre of global iron ore demand for deflation:
Striking a balance between growth and stability. We agree with the chairman of the CBIRC that the property sector is one of the gray rhinos in China. In our China Credit Conundrum published in 2013, we cited a property sector collapse as a potential trigger for a significant credit event in China. Though with the sector being a major contributor to China’s GDP, policymakers have adopted a balanced approach – on one hand, the sector has been key in the past to boost activity levels, has been relied upon by local governments for fiscal revenues and to satisfy consumer demand; on the other hand, various risk control measures have been introduced to prevent asset bubbles forming, including home purchase restrictions and limitations on second home mortgages.
Leverage has continued to rise over the past decade. Despite this balanced approach, leverage related to the property sector has risen sharply over the past decade.We estimate the total amount of borrowing by China property companies reached RMB31tn1at the end of 2020, representing a 5-fold increase since the end of 2011, with the largest increase stemming from domestic bond issuance and shadow banking (Exhibit7). Furthermore, mortgage lending has increased at a faster pace in recent years, andthe total amount of mortgage loans outstanding has reached 34% of GDP, exceeding our estimate of 31% of GDP for property developer debts (Exhibit 8). We believe these factors contribute to the continued focus to reduce risk in this sector, and policymakers have repeatedly stressed in recent years that housing is for living, and not for speculation.
