The pin currently thrusting its way inside the Chinese real estate bubble has been lent extra impetus in the shape of more weak new economic data from the PRC. The HSBC Flash Purchasing Managers Index (PMI) fell to 48.7 in May from the preceding month-end reading of 49.3. This – the earliest indicator of industrial activity in China – has now remained under the growth level of 50 for seven straight months.     

Forex brokers and economists on top of the data emerging from China, have now suggested that Beijing will have no choice but to pile on extra stimulus measures in a bid to prevent further deterioration of the world’s second largest economy. “All signs point to the fact that the slowdown is not letting up as fast as authorities had expected partly because of challenging external conditions and partly because of the fact their tightening last year was too effective,” Donna Kwok, HSBC, Greater China Economist told CNBC Asia’s “Cash Flow”.

“We are going to have to see more active support being directed directly to consumer and business rather than through the monetary system via the banks,” Kwok added.

The CPY slid to a fresh 6-week-low against the greenback off the back of the disappointing PMI data according to live forex charts, trading at 6.3405 against the U.S. dollar in early Asian deals on Thursday. The next downside target level for the yuan is seen at 6.343. The dollar-yuan pair ended yesterday's trading at 6.3357.

Despite tightening measures on monetary policy being put in place to combat rising inflation back in 2009, the growing risks associated with a Grexit and the nation’s ongoing battle to keep a handle on its property problem could signal a rapidly approaching hard landing for the economy. During late Asian trade, Hong Kong's Hang Seng Index (HSI) fell 0.35 percent, Australia’s ASX/200 Index dipped 0.3 percent, while Japan’s Nikkei 225 Index ended flat.

Borrowing and building

The loosening of restrictions instigated by the Chinese government – designed to keep the economy in growth in the face of a global economic crisis – prompted home prices to rise in excess of 50 percent over the three years ending 2010. Once officials became intimidated by the steep rise in prices and resident frustration at the lack of affordable housing, we saw the introduction of measures designed to curb the market; strategies such as, higher downpayments, tough qualifications for mortgages, residency requirements and limits on investment purchases.

As a testament to the rapidly deflating bubble, row-upon-row of empty condos now stand; built by developers who had been engaged in a constant cycle of borrowing, convinced that the government would back down to maintain economic growth. “Just like their American counterparts, the Chinese wanted a piece of the real estate riches. So they bought apartment after apartment, never intending to rent them out”, said Patrick Chovanec, associate professor at Tsinghua University in Beijing.

"Every city in China has a new development district with row upon row of condos that are sold, but empty," Chovanec said.

Falling sales

The emergence of further negative data pertaining to China’s economy has revealed the extent of the problem as it stands, with the curbing measures that were put in place by Beijing delivering some serious clout two years on. According to Credit Suisse, in the first quarter of 2012 national land sales volumes fell 18 percent year-on-year, the biggest decline on record. And in the first four months of this year house prices fell in the major cities by 2.6 percent year-on-year according to China property research firm Soufun.

A report released Friday showed that property prices in the nation’s largest cities have now been falling for seven months, while there has been a total absence of land sales in Beijing. Providing an insight deep inside the balance sheets of 30 of China’s biggest property companies, S&P report that the sum of debt due rose 57 percent as of December 2011, now standing at CNY156bn.

Wider impacts

One of the most profound problems associated with falling land prices is the threat this poses to its local governments, who have historically relied upon land sales to raise cash for growth stimulation. "The knock-on effect of a falling property market is that land in China's major cities is worth much less than at the height of the property boom last year”, a Hong Kong-based credit analyst told Thomson Reuters earlier today. “And that is likely to spell big problems for those local Chinese authorities which have massive debt service burdens and can no longer rely on land sales to finance them.”

According to current data provided by a chief global equity strategist at brokerage Jefferies, GDP in China is currently running at 5 percent, which is much below the government’s 7.5 percent target. As Ashraf Laidi pointed out earlier today in an interview with CNBC, the Chinese growth story will undoubtedly prove influential the world over: “The PMI from China is leading the macro argument that, from the trade headwinds, will not be very good for China and will broaden risk for the EURUSD.”

Sarah Cox, Staff Writer