Will a Chinese property bubble burst affect South Africa?

FNB warned yesterday that the possible bursting of a Chinese property bubble together with the weakness in other areas of the Chinese economy could have "significant potential implications" for South Africa's residential property market.

John Loos, the household and property sector strategist at FNB, said the potential impact was not seen to be a direct one via any major withdrawal of Chinese investment in the South African residential property market, but rather an indirect one via the impact on China's economy and therefore on South Africa's own economy and the finances of the household sector.

Loos believed that what happened in China's housing market along with other areas of its troubled economy was "the big news to South Africa's economy and thus its own residential market at present", rather than Greece's financial crisis.

He said South Africa's household sector had reduced its vulnerability to shocks somewhat through lowering its debt to disposable income ratio to 78.4 percent from 88.8 percent in early 2008.

But Loos said this remained a high level of indebtedness by South Africa's own historic standards and the country already had an economy of weak gross domestic product and income growth while global growth was already slower than its mini peak around 2011.

"We can ill afford any further influences," he said. Loos added it had long been stated that "when the US sneezes, the rest of the world catches cold" and China was "not quite the US yet", but as the world's second largest economy was in the league of countries with very significant global influence. China has also become South Africa's major trading partner.

But Loos said foreign buyers of South African residential property were a relatively small group and Chinese contingent of this group was believed to be far smaller. He added that a "China hard landing scenario" did not appear likely to be a 2008-style shock, which had involved a big consumer price index (CPI) inflation surge due to the combination of a global oil price shock, a global food price inflation shock and significant rand weakness.

Loos said this time the risk of such a big inflation shock to where South Africa's CPI inflation peaked in double-digits appeared a little less because the oil price shock risk had been lowered by big investment in supply capacity in recent years. That would imply perhaps less risk of interest rate hiking, barring a massive rand weakening, he said.

Loos said it was more likely the China hard landing scenario posed significant downside risks to South Africa's economic, employment and disposable income growth.

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