Nov. 29 (Bloomberg) — Property risks are “overshadowing” China’s economic outlook as a slowdown in sales threatens to trigger developer collapses, the Organization for Economic Cooperation and Development said.

“While the exit of small developers would not pose a problem, the failure of large promoters could put some bank lending at risk, perhaps triggering negative chain reactions,” the Paris-based OECD said in a report yesterday. “A key risk is an overly quick liquidation of unsold property.”

China’s economy, the world’s second biggest, will expand 8.5 percent next year even as export growth is pulled down by weak demand and a decline in the nation’s competitiveness, the report said. Government housing projects can help to support construction and moderating inflation may allow Premier Wen Jiabao’s government to cut interest rates from the middle of 2012, the OECD said.

Vice Premier Li Keqiang said Nov. 25 that the property market is at a “critical stage” and indicated that curbs should be maintained even as sales fall. October housing transactions declined 25 percent from September and prices fell in 33 of 70 cities, according to government data.

China Vanke Co., the nation’s biggest publicly listed developer, has said that it may adjust prices at some projects though it has no plans to do so nationwide.

“Individuals have been holding back from purchasing houses and developers carry a rising level of unsold inventory,” the OECD said. A property slump could hurt migrant workers relying on construction work and purchasers facing losses, it said.

Japan’s Risks

Japan, the region’s second-biggest economy, risks seeing a spike in government bond yields unless it controls a debt load set to approach 230 percent of gross domestic product in 2013, the OECD said.

“The delay in fiscal consolidation and the continuing rise in the public debt ratio compound the risk of a run-up in long- term interest rates,” the report said.

Yields on benchmark 10-year notes touched 1.065 percent yesterday, the highest level since Sept. 2, after Standard Poor’s and the International Monetary Fund last week warned about the country’s mounting debt. The government should weigh forming a panel to assess its policymaking progress and put a “stronger legal foundation” under its fiscal targets, the OECD said.

While the economy is recovering from the March 11 earthquake, the initial boost after the disaster has started to wear off, the OECD said. Reconstruction demand will help drive growth through the middle of 2012, it said.

Australian Rate Cuts

Elsewhere in Asia Pacific, Australia has scope to cut interest rates should Europe’s sovereign-debt crisis stall global growth, the OECD said, a scenario investors already are betting on.

If downside risks to the international economy materialize, “monetary policy should be eased significantly to sustain demand in the context of moderating inflation,” the OECD said. Australia’s government could also boost spending, it said, though that would delay a pledged return to a budget surplus in 2012-13.

Australia’s central bank responded to heightened global risks and weaker inflation pressure by lowering its benchmark rate by a quarter percentage point to 4.5 percent on Nov. 1, the first reduction in 31 months. Swaps traders wager policy makers will need to cut again and reduce borrowing costs by more than 1.5 percentage points over the next year, a Credit Suisse Group AG Index shows.

–Paul Panckhurst, Lily Nonomiya, Michael Heath. Editors: Paul Panckhurst, Nerys Avery

To contact Bloomberg News staff for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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