The risk of a so-called “Volcker moment” in China is still on with the worst yet to come for its property sector and economic growth set to plunge to just 2.9% in the first quarter of next year, says Nomura Holdings.
Nomura first warned about the risks of Volcker moment in August as it worried policies to rein in skyhigh housing prices were too stringent. It now says that warning has largely gone unheeded by Beijing.
“We might only be in the early stages of China’s Volcker moment,” said economists led by Lu Ting in a December 8 note. “The worst for the property sector is yet to come. The situation in the property sector and China’s macro economy will still likely worsen, and we might need to see the deterioration worsen before Beijing significantly steps up easing measures.”
A ‘Volcker moment’ refers to radical moves made by former US Federal Reserve chairman Paul Volcker in the late 1970s, when he raised interest rates dramatically to successfully contain inflation. Volcker’s actions led to a substantial recession in 1980-82
Due to Beijing’s unprecedented curbs, the property sector has rapidly deteriorated in the past couple of months, triggering rounds of defaults in both offshore and onshore bond markets.
The Nomura team says Beijing’s pain threshold is significantly higher than in the past and that policymakers are much more willing to take short-term hits if they result in longer-term gains.
The property sector contributes one-quarter of China’s GDP, 44% of governments’ revenue, and more than 70% of Chinese households’ wealth, Nomura estimates.
Raising Rates to Beat Inflation
Warnings that China’s campaign to cool its property market will go too far are multiplying. Bank of America economists argue that the credit squeeze on the property sector is “unnecessarily aggressive” and weighs on industrial demand and consumption.
Yan Wang, chief China macro strategist at Alpine Macro, said China’s latest numbers confirm that the economy has continued to decelerate across the board.
“We have been repeatedly warning that immediate policy loosening is urgently needed to avoid a major economic slump and a hard landing in the housing sector,” he said.
Nomura economists have reiterated their warnings in their latest report. “We could see a continued deterioration in the property sector, property indices, governments’ fiscal conditions, the economy and the financial sector,” they wrote.
“Despite the markets’ concerns over the turbulence in the offshore dollar bonds, we might only be in the early stages of China’s Volcker moment.”
- George Russell