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Severe decline in property sector could plunge Chinese growth to 0%

Property and construction has been the biggest driver of China's expansion, contributing a quarter of fixed asset investment and employing 77 million people but its severe decline could reduce China's growth to just 0% they are warning.

The central bank has cut its key interest rate again but that combined with active moves from the government is failing to halt the decline. Construction of homes, offices and factories fell at least 16.6% percent in October after rising 32.5% percent a year earlier, according to Macquarie Securities Ltd.

'If real estate contracts by 30% it doesn't matter how much the government spends on infrastructure, the economy is still going to be very weak. Property is at the epicentre of economic weakness,' said Paul Cavey of Macquaries.

'China is now at the heart of the global slowdown with property leading the way. This is going to impact severely on its growth which could be dragged down close to zero next year,' said Jim Walker, chief economist at Asianomics, an economic advisory firm in Hong Kong.

'The global financial crisis won't get China to 0% growth and neither will recession in developed economies,' said Tao Dong, chief Asia economist at Credit Suisse in Hong Kong. 'If there's a collapse in the property market that might do the job.'

The World Bank has slashed its forecast for China's expansion next year to 7.5%, the slowest in almost two decades, from 9.2% in the previous quarterly report, saying the country could no longer rely on overseas consumers.

'The real estate sector has seen a particularly pronounced slowdown. Real estate investment growth is now close to zero,' said Louis Kuijs, a senior economist at the World Bank in Beijing.

Property and exports together have contributed about half of the expansion in China's GDP, according to Andy Xie, an independent analyst in Shanghai. 'That growth has now gone. It's going to be tough,' he said.

Merrill Lynch is forecasting just 1.5% global growth next year but that is based on an 8.6% expansion in China which is looking increasingly unlikely.

There is concern that the downturn in the economy and associated results like rising unemployment may lead to social unrest. Police and security guards last week attempted to breakup demonstrations by fired workers who overturned a police car, smashed motorbikes and broke company equipment in southern Guangdong province.

However China does have the ability to spend because it has debt equal to 15.7% of gross domestic product compared with 75% in India, a budget surplus and the world's largest currency reserves at $1.9 trillion.

But it is property that could drag the economy down. Shanghai house prices fell 19.5% in the third quarter from the previous three months, according to real estate broker Savills.

Declines in apartment values are accelerating in Shenzhen and Guangzhou, two of the fastest growing cities in Guangdong province, which produces 30% of China's exports.

Construction will contract 30% next year after expanding 9% in the first three quarters of 2008, according to Macquarie Securities.