China property slump threatens global economy

China accounted for 27 percent of global growth last year, and building is the biggest driver of China’s expansion, contributing a quarter of fixed-asset investment and employing 77 million people. As home prices have dropped, so has construction. The decline is squeezing an economy already slowed as recessions in the U.S., Japan and Europe cut demand for China’s exports.

“China is now at the heart of the global slowdown,’ said Jim Walker, chief economist at Asianomics Ltd.,” an economic advisory firm in Hong Kong. “It means that global growth is probably going to be dragged down close to zero next year.”

China’s central bank cut its key interest rate by the most in 11 years last week and the government said forceful measures were needed to arrest a faster-than-expected economic decline. Without more rate cuts and government spending, China is unlikely to contribute the 60 percent of global growth Merrill Lynch & Co. forecasts for next year, further slowing the world economy.

House prices in Shanghai fell 19.5 percent in the third quarter from the previous three months, according to real estate broker Savills Plc. In Guangdong province, which produces 30 percent of China’s exports, declines in apartment values are accelerating in Shenzhen and Guangzhou — two of the fastest growing cities.

Construction of homes, offices and factories fell at least 16.6 percent in October after rising 32.5 percent a year earlier, according to Macquarie Securities Ltd. Construction will contract 30 percent next year after expanding 9 percent in the first three quarters of 2008, Macquarie said.

In 2005, China vaulted past the U.K. to become the world’s fourth-largest economy, after expansion averaged 9.9 percent annually for the previous 30 years. Gross domestic product has increased 69-fold since Deng Xiaoping began free market changes in 1978.

Merrill’s forecast of 1.5 percent global growth next year is based on an 8.6 percent expansion in China. The World Bank last week slashed its forecast for China’s expansion to 7.5 percent, the slowest in almost two decades, from 9.2 percent in the previous quarterly report, saying the country could no longer rely on overseas consumers. Walker estimates China will grow zero to 4 percent, with a 30 percent chance of a contraction.

“The real estate sector has seen a particularly pronounced slowdown,” said Louis Kuijs, a senior economist at the World Bank in Beijing. “Real estate investment growth is now close to zero.”

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