S&P Sees Risk to China Economic Growth From `Sharp Pickup' in Home Prices

A “sharp pickup” in China’s property prices is a key risk to the nation’s economic growth, Standard & Poor’s said as it forecast a 10.3 percent expansion this year.

The property market “looks darn good, it’s been going up, and this is a classic bubble,” David Wyss, chief economist at S&P, told reporters in Hong Kong today. Prices are rising to an “unsustainable” level and will “come down,” he said.

The property sector contributes about 20 percent to the economy through real-estate investments and related industries, according to Citic Bank International Ltd. Since April, China has restricted pre-sales by developers and curbed loans for third-home purchases to cool the market after excess liquidity stemming from record credit growth last year buoyed demand.

Property prices rose 10.3 percent from a year earlier in July, the slowest pace in six months.

The Shanghai Composite Index, which tracks the bigger of China’s two main stock exchanges, fell 21 percent this year. Investors are concerned that “slowing growth” will be shown in coming economic data, said Wang Zheng, chief investment officer at Jingxi Investment Management Co. in Shanghai.

“While China’s growth trajectory remains solid, we expect some softening in the coming quarter largely on the back of uncertainties in Europe,” Wyss said. Rising commodity prices may also constrain the nation’s economic growth, he said.

Trade Surplus

The nation’s trade surplus has also added to pressure from the U.S. for China “to move to a more balanced trading relationship,” Wyss said. The surplus surged 170 percent from a year earlier to an 18-month high in July.

The U.S. Commerce Department plans to step up enforcement of trade laws against nations, such as China and Vietnam, that help subsidize companies exporting cheap goods to the U.S. The plan is part of the administration’s effort to double exports in the next five years to spur job growth in the U.S., where the unemployment rate was 9.5 percent in July.

Wyss also said the yuan is “undervalued” and policy makers should allow gains in the currency as this is in the interests of both China and the world. Premier Wen Jiabao’s government has limited the yuan’s rise to less than 1 percent since ending a two-year peg to the dollar in June.

To contact the reporter on this story: Sophie Leung in Hong Kong at sleung59@bloomberg.net

Aug. 27 (Bloomberg) -- David Wyss, global chief economist at Standard & Poor's, talks about the outlook for China's economy. Wyss also discusses economies in the U.S. and Europe, and North Korean leader Kim Jong Il's reported visit to China. Wyss speaks in Hong Kong with Rishaad Salamat on Bloomberg Television. (Source: Bloomberg)