China's Economy Will Weather Housing-Market Slowdown, Goldman Sachs Says.

China’s economic growth will withstand a slowdown in the nation’s property market because households borrowed less to purchase their homes than in developed nations, according to Goldman Sachs Group Inc.
“The housing slowdown is unlikely to cause a much broader significant slowdown in activity due to low leverage,” Goldman economists, led by Michael Buchanan in Hong Kong, wrote in a report today. “It seems unlikely that even a fairly large fall in prices would create the kind of negative equity we saw in the U.S.” housing market, the analysts wrote.
The efforts by Premier Wen Jiabao’s government to rein in property prices fuelled by last year’s record credit binge have spurred concern tighter policies will undermine the world’s fastest-growing major economy. China’s benchmark Shanghai Composite index of shares has tumbled 16 percent this year.
Policy makers’ efforts are starting to have an impact on China’s real-estate market, according to Goldman, the New York- based investment bank. Property sales have “plummeted in the last two weeks” and there are “clear signs of price falls in some of the hottest projects,” the report said.
Officials will probably take further steps to tighten credit in order to avoid overheating in the economy, relying mainly on “guidance” to banks on lending amounts, the economists wrote.

Additional Measures:
The People’s Bank of China has boosted banks’ minimum reserve requirement three times this year, while it has yet to raise benchmark interest rates from crisis levels. The government has also refrained from ending the currency’s peg to the dollar, adopted in mid-2008 to help shield exporters during the global recession.
Chinese policy makers will “repeatedly” use the tool of reserve requirements, Goldman economists said. Consumer-price inflation exceeding 3 percent to 4 percent would make the case of raising interest rate more likely, the report also said.
The bank also expects a 5 percent appreciation in the yuan against the dollar by year-end, while the move won’t be an “up- front sharp revaluation.”
Measures to cool the real-estate market have included a ban on loans for third-home purchases, raising mortgage rates and tightening down-payment requirements for second-home purchases.
China has a “relatively under-leveraged household sector,” as the minimum deposit for buying first homes is at least 20 percent, while second-home purchases need 40 percent, Buchanan said. China’s household debt is only 22 percent of the nation’s gross domestic product, while mortgage debt is 14 percent, he wrote. By contrast, Federal Reserve figures show $10.3 trillion of U.S. mortgage debt outstanding at the end of 2009, the equivalent of 70 percent of GDP.
In March, property prices rose 11.7 percent across 70 cities from a year earlier, the most since data began in 2005. The inflation rate was 2.4 percent, compared with a government target for the year of about 3 percent. April figures are due next week.