Property sector Chinese economy's top risk in China

The recent downturn in China's real estate sector is the biggest macro risk for the Chinese economy this year, but it is unlikely that home prices will tumble nationwide, a senior J.P. Morgan economist said on Friday. Zhu Haibin, chief China economist with the financial institution, told a small group of reporters here that systemic financial risk triggered by the nation's property sector is not likely in the short term, and that China will not experience a wave of home loan defaults. There will likely be a slight decrease in home prices nationwide, but ongoing urbanization, increases in household income and high savings rate in China will help buttress prices, Zhu said. Second-tier cities with an over-supply of homes should brace for the biggest home price drops, while most Chinese cities excluding Beijing and Shanghai are confronted with an over-supply of commercial properties like offices and retail units, he added. China's real estate development climate index dropped 0.61 points from March to 95.79 points in April, the National Bureau of Statistics announced earlier this week, fresh evidence that China's property sector has showed further signs of cooling after years of rapid growth. China's smaller property developers, especially those whose housing projects are concentrated in small cities, are experiencing more financial pressure than industry leaders, according to Zhu, who recommended that localities should ease restrictions on home purchases set several years ago in line with local conditions. Industrial overcapacity is another big risk for the Chinese economy in the short term, and the country needs to improve its investment efficiency. China should push forward structural economic reforms including financial reform to find new growth engines, he argued. The Chinese economy will likely gain momentum in the second half of this year due to stable service sector development and rebounding export demand on the back of economic recovery in key developed countries. After years of economic recovery, the U.S. Federal Reserve may start raising the federal funds rate around the third quarter of 2015, Zhu predicted.