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Credit conditions in China warrant special attention in light of the country's considerable size and systemic importance to the global economy.
The property and credit markets in China represent potential vulnerabilities in an environment of decelerating-albeit still good-growth. In part because of administrative measures intended to prevent or deflate property bubbles, house prices in most Chinese cities have been moving downward since 2008 and appear to have recently bottomed. (See Figure 1.)
Housing affordability is still stretched. While most market participants think price declines have ended or bottomed, some analysts believe housing prices may resume their fall. If prices have bottomed, pressure will be taken off property developers, local governments relying on land sales for revenue, and other exposed sectors. (See Figures 2 and 3.) With real estate investment accounting for 13% of economic output and about 20% of bank loans, if housing prices resume their decline the housing sector could have a strong negative effect on the quality of bank assets.
China is already at an advanced stage of the credit cycle. As a result of stimulus measures adopted in response to the global credit crisis, overall credit in China (according to the IMF) has grown at an average annual rate of more than 25% from 2009 to 2011, bringing the overall credit-to-GDP ratio above 150%. Christopher Woods of CLSA Securities wrote: "The latest China credit data is far from disastrous. But it also does not end growing concerns...