Will China's trillion dollar infra loans repeat 2008 US mortgage crisis?

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By Deepak Rangan
China is getting worried. Its manufacturing activity is declining, exports are falling and its infrastructure sector, the driver of robust growth over the past years, is not only slowing but will also leave the country with trillion dollar debts!

China's GDP figures of late has been anything if disappointing. Q3 GDP, even though at 9.1% looks extremely good, is by China standards pretty low. In fact it was the slowest in almost 2 years! GDP growth estimates have also been revised down for 2012 and 2013.

With many expecting the economy to slowdown, Chinese Premier Wen Jiabao may decide on cutting taxes in order to spur growth, a Barclays report suggests.

But will cutting taxes solve China's problems?

The Chinese economy has been driven by two main sectors- exports and infrastructure. With US and Europe decelerating and their growth expected to remain weak, exports from China will face significant lower volumes.

But the main problem of the Chinese will be its infrastructure. There is no other sector that provides employment to more people and to all levels of people than infrastructure. About $2.8 trillion in infra loans have been funded in 2009 and 2010, as per Bloomberg.

But the continuous monetary tightening by the central bank has ensured that the property prices have been cooled off. The prices have declined and the loans have stayed!

“The first signs of a downturn emerged in August,when China’s top 10 property developers reported unsold inventories totalling RMB 318 billion (US$ 50 billion), up 46% from the previous year. Highly leveraged, with debt to asset ratios approaching 65%, developers were coming under increasing pressure to liquidate those inventories for cash. The fire sale began in October, with several Shanghai developers slashing sale prices on new apartments by 25% or more”, a Business Insider report says

A recent report by IIFL institutional equities suggest that Chinese property prices will fall by an additional 20%-30% over the next 12 months.

And lower property prices will discourage more infra investment in the sector, which means lower jobs. Coupled with the loss of jobs in exports, China could face a serious problem of unemployment.

We have seen what a property bubble explosion could do. Defaulting mortgages, mass unemployment, bank losses and if leveraged, even bank crashes. Yes we have seen it the US. In 2008.

Looks like a simple tax cut will not do.