SHANGHAI -- Chinese housing prices continue to fall, with the average price of new homes in 70 cities declining on the month for the third straight month in July, according to data released by the National Bureau of Statistics on Aug. 18.
Given that real estate prices have been a main driver of China's economic growth, continuous falls in housing prices could cause the world's second-largest economy to stutter.
Trouble in paradise
In the country's southernmost province of Hainan, an island often called "China's Hawaii," the city of Sanya is known for seeing rapid inflows and outflows of funds for property development due to the presence of beach resorts.
Housing prices there dropped 2.4% on the month in July, the second-largest fall in China after the 2.5% slide in Hangzhou, Zhejiang Province. In the first six months of 2014, real estate investment in Sanya totaled 14.1 billion yuan ($2.29 billion), not too different than the city's gross domestic product of 19.1 billion yuan. A slowdown in property development, Sanya's core industry, could deal a serious blow to the municipal economy.
Housing sales in Sanya plunged 39% on the year in the January to June period. Worried city officials in charge of statistics and development visited property development projects on July 22 and urged developers to promptly submit reports on projects that have already begun so that they can be added to government data.
While Sanya is an extreme case, the Chinese economy undeniably relies heavily on the property market. The construction and real estate industries accounted for around 13% of the country's nominal GDP of 26 trillion yuan in the first half of 2014.
Guo Qian, executive vice dean at the Research Institute of China Development Bank, told a Chinese newspaper that a slowdown in property development will depress economic growth by 0.33% in 2014.
One troubling factor is that the housing price falls are directly linked to financial risks.
One man exemplifying this risk is Liao Rongna, founder of Liuzhou Zhengling Group, an autoparts maker based in Liuzhou, in the Guangxi Zhuang Autonomous Region. The International Criminal Police Organization has issued an arrest warrant for him on suspicion of illegally collecting funds.
Liuzhou Zhengling increased its earnings on sales of autoparts and began developing hotels and commercial facilities. But the expansion push backfired and the company ran into financial difficulty.
Liuzhou Zhengling issued a statement saying it will resolve its debt crisis under the leadership of the local government. But concern is growing that the company will not be able to repay some 270 million yuan in a trust product that has invested in it and will fall due in 2015.
Because the Chinese government has strong authority and fiscal leeway, it is expected to take policy measures to avert any sharp economic downturns. Nevertheless, the task of bringing housing prices under control will be anything but easy.