World Bank warns of China property downturn risk

BEIJING: The World Bank warned Thursday measures to cool China's red-hot real estate sector could trigger a sudden downturn in the market, posing risks for the world's second-largest economy.

But the Washington-based lender said it was "too early" for authorities to halt monetary tightening because inflation expectations remained high and much of the impact of soaring global commodity prices was "still in the pipeline".

"Shocks to the property sector that would slow down construction significantly could have a large impact on the economy and on bank balance sheets," the World Bank said in its China quarterly update.

"Moreover, a property downturn could affect the finances of local governments, which do a lot of the infrastructure investment and are important clients of the banking system."

Beijing has introduced a range of measures to cool the property market since late 2009 after a flood of bank lending sent real estate prices soaring and fuelled fears of a dangerous bubble in the key sector.

Authorities -- worried high prices could spark social unrest -- have banned purchases of second homes in some cities and increased minimum down-payments. Cities such as Shanghai and Chongqing have introduced trial property taxes.

The central bank has also repeatedly raised the amount of money banks must keep in reserve, effectively restricting lending, and hiked interest rates to fight inflation, which in March hit its highest level since July 2008.

Data released earlier this month suggested the measures could be having an impact, with a small but growing number of Chinese cities seeing the cost of new homes falling in March.

But the World Bank warned "interaction between the market and policy measures could lead to a more abrupt than planned downturn in the real estate market".

"In the medium term the widespread use of property as (an) investment vehicle and the role of local governments add to the risks," it said.

While the World Bank said its inflation projections were "not particularly worrying" -- five percent for 2011 compared with 3.3 percent in 2010 -- the risks from further global commodity price rises called for "vigilance".

"Macroeconomic policy remains key in limiting the spill-over of higher prices of food and other raw commodities into other prices and wages and containing other risks, including in the property market," the report said.

The World Bank also forecast China's economic growth would slow to 9.3 percent this year compared with 10.3 percent in 2010. That was higher than its previous forecast in January for 8.7 percent growth and the upgrade follows stronger than expected growth in the last two quarters.