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    China Business
     Dec 8, 2011


Cooling economy leaves air
in China's homes market

By Robert M Cutler

MONTREAL - Property prices continue to decrease in China, but there is no sound of a bubble popping. The China Index Academy, an institute focusing on real estate, reports that property prices declined in November for the third month in a row, down 0.3% from October after October was down 0.2% from September. Prices fell in all 10 of the biggest cities, and in 57 of the 100 that the Academy tracks.

This is in line with the report last month by China's National Bureau of Statistics that that residential property prices fell in October in 33 of the 70 cities it tracks, double the number from September. In a report released on Monday, Credit Suisse forecasts residential property prices in China to decline 20% from their high in 2011 through the end of 2012.

Home prices in many second- and third-tier cities still grew

 
strongly, as the central government continued to enforce policies to restrict home purchases on the local governments. The latter, by contrast, have an interest in liberalizing such purchases because local authorities derive significant revenue from sales of land. That is easier for them than crafting policies to promote small and medium enterprises, which therefore suffer and have not driven job-creation as strongly as they might have done.

Other statistics released this week suggest a continuing slowdown in Chinese economic growth, also due to domestic rather than international factors. From China, economists look at two Purchasing Managers Indexes (PMIs), which are measures of manufacturing activity with a neutral value of 50. A figure over 50 indicates economic expansion, and under 50 contraction. The official PMI released by the China Federation of Logistics and Purchasing fell from 50.4 in October to 49 last month, while the PMI compiled by HSBC fell from 51 to 47.7.

The PMI news follows the November 29 action by the People's Bank of China (PBoC - central bank) to cut the required reserve ratio for the country's banks by half a percentage point to 21% for the largest banks. This had the effect of increasing the amount of capital available for transfers among banks and for lending, and was seen as an indicator of the end of a general policy of monetary tightening.

In response, the SSCI stock index in Shanghai jumped 2.3% in a single day, although it has since settled back down to its level of a week ago, before the move. The SSCI is now at its lowest level since March 2009 and is still imprisoned in a marked downtrend channel that began eight months ago. If the high 2,200s are violated, then the next potential technical support (based December 2008) is to be found at 2,020, with real terra firma only lower, in the low 1,700s. Short-term technical indicators are generally unfavorable, medium-term indicators likewise unfavorable although a bit less so.

Declining real property prices and the loosening by the PBoC have increased the impression, or at least the hope, that China may obtain its desired "soft landing". However, the PBOC's loosening together with an anticipation relaxation of central restrictions on local property sales may lead to inflating the property bubble once more.

But Morgan Stanley's Stephen Roach is skeptical of the skeptics, telling Bloomberg News that while Europe, China's biggest export market, is showing softening demand, nevertheless China can be expected to "make conventional policy adjustments to stimulate their economy", which the US for example cannot do. Roach expects inflation to continue to fall in China.

If the central decision has been taken in Beijing that there should be no more property bubble, then there could be negative consequences for economic growth next year. Decreased home construction would have knock-on slowdown effects in related industries, and demand would also fall for products and materials whether domestic or imported. Such a slowdown could be felt worldwide through, for example, decreased prices for copper, which is widely used in home construction and home appliances.

Already there is discontent among recent home and apartment buyers who have seen prices fall by as much as 20% since their purchases were finalized. Developers will have to cut prices even more to unload inventories in order to service their debts. Housing starts in August were up by almost one-third over August 2010, but in October they were essentially the same as October a year ago.

Despite this and other social problems related to housing (for example, there are also older Chinese who have put their life savings into real estate), an expert consensus is forming that the real estate bubble in China has been exaggerated. That is not to say that problems do not exist and will not continue. However, even a generalization of price cuts across the board for homes would not produce a "systemic crisis" because of strict mortgage regulation and the requirements for large down payments.

Dr Robert M Cutler (http://www.robertcutler.org), educated at the Massachusetts Institute of Technology and The University of Michigan, has researched and taught at universities in the United States, Canada, France, Switzerland, and Russia. Now senior research fellow in the Institute of European, Russian and Eurasian Studies, Carleton University, Canada, he also consults privately in a variety of fields.

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China's property boom cools, pain spreads (Nov 30, '11)

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