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
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
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
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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