China's Economic Momentum Has Peaked as Property Measures Bite, UBS Says

China’s economic momentum has peaked and interest rates won’t rise until June “at the earliest” after an increase in banks’ reserve requirements and measures to cool the property market, UBS AG said.

A construction slowdown and a correction in property prices “seem inevitable” in coming months, Wang Tao, a Beijing-based economist, said in a note dated yesterday.

China intensified a campaign against property speculation after record price gains in March, helping to drive a decline of 10 percent in the Shanghai Composite Index in the past month. April economic data, due to be released next week, “will likely show that the momentum of China’s economic activity has peaked,” Wang said.

Gross domestic product grew 11.9 percent in the first quarter, the fastest pace in almost three years, highlighting the nation’s role as the leader of the global recovery. The central bank is yet to raise benchmark interest rates from crisis levels and another policy to counter the global slump, the yuan’s peg to the dollar, also remains in place.

While industrial output, retail sales and fixed-asset investment remained “buoyant” in April, slower growth is likely in coming months, the economist forecast.

Wang expects construction activity to fall at some time during the second half, paring this year’s growth to between 10 percent and 15 percent.

Public Housing Projects

A slowdown in investment and new construction work in large cities and high-end property over the next few months may be partially offset by “mass market” and public housing projects and accelerating urbanization in inland regions, she said.

Paul Cavey, a Hong Kong-based economist at Macquarie Securities Ltd., said yesterday that China may reverse in the fourth quarter policies cracking down on the property market. The government will change tack rather than risk failing to meet its 8 percent economic growth target for the year, Cavey said.

The central bank has raised banks’ reserve requirements three times this year, most recently this month, to withdraw money from the financial system. To cool the property market, government measures have included banning loans for third-home purchases and raising mortgage rates and down-payment requirements for second homes.

--Kevin Hamlin. Editors: Paul Panckhurst, Lily Nonomiya.

To contact the reporters on this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net

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