Chinese property prices rose at the fastest pace in more than two years in major cities, defying tougher government curbs and constraining the ability of policy makers to ease credit in response to weakening economic growth.
New home prices in Beijing, Shanghai and Guangzhou posted the biggest gains in May since at least January 2011, and 69 of the 70 cities tracked by the government showed increases, the most since August 2011, National Bureau of Statistics data showed today in Beijing. Inbound non-financial investment rose 0.3 percent in May from a year earlier, the weakest in four months, according to the Ministry of Commerce.
The property gains limit the ability of Premier Li Keqiang to counter an economic slowdown that showed signs of deepening in May. The central bank today refrained from adding cash to the financial system and money-market rates reached the highest level in seven years this month, a liquidity squeeze that Fitch Ratings says may accelerate a banking crisis.
“The government is in a dilemma right now,” said Zhang Zhiwei, Hong Kong-based chief China economist at Nomura Holdings Inc., who previously worked at the International Monetary Fund. “It’s difficult for China to tighten the property market, while it also needs to bolster the economy, which has a strong reliance on property.”
China’s one-year interest-rate swaps rose to a 21-month high today. The yuan weakened 0.1 percent, the most since June 6, to 6.1291 per dollar, as of 11:25 a.m. in Shanghai. The MSCI Asia Pacific Index of stocks fell 0.5 percent.
The government in March stepped up a three-year campaign to cool home prices, with Beijing issuing the toughest measures among 35 provincial cities. The country will widen property tax trials, which have only been introduced in Shanghai and Chongqing, the State Council said in a May 24 statement.
Local governments are reluctant to enforce policies aimed at cooling the housing market, Zhang said. Former Premier Wen Jiabao in March ordered central bank branches to raise down-payment requirements for second mortgages in cities with excessive cost gains and told local governments with the biggest price pressures to tighten home-purchase limits and set price-control targets.
Today’s data showed the southern city of Guangzhou posted the biggest gain with prices rising 15 percent from a year earlier. Beijing prices climbed 12 percent, while they advanced 10 percent in Shanghai. All three cities had their biggest advance since the government changed its methodology for the data in January 2011.
The only decline in new home prices last month was in the eastern city of Wenzhou, where they fell 3.6 percent from a year earlier, according to the data.
Home prices in China had the biggest quarterly gain among 55 countries globally in the first three months of the year, based on Beijing and Shanghai prices, broker Knight Frank LLP said in an e-mailed report yesterday.
A slowdown in capital inflows has contributed to cash shortages in China’s money market. Fund flows have declined amid a government crackdown on hot money, an economic slowdown and speculation that the Federal Reserve will rein in policies that have boosted the supply of dollars.
Agricultural Development Bank of China Co. scaled back the size of two bond offerings today by 31 percent after the Finance Ministry failed to sell all of the debt offered at an auction for the first time in 23 months last week.
“We are starting to see some issues emerging” in liquidity, Charlene Chu, Fitch’s head of China financial institutions, said in an interview today with Zeb Eckert on Bloomberg Television in Hong Kong. “It will be very important over the next month or so to see how that plays out. If that doesn’t go away, some of this may be moving ahead faster and earlier than we thought.”
Inbound non-financial investment increased to $9.26 billion, the Ministry of Commerce said today in Beijing, after a 0.4 percent gain in April. China’s outbound investment rose 20 percent in the first five months of the year to $34.3 billion, compared with a 27.4 percent pace in January-April.
The investment report follows data indicating capital inflows slowed last month while growth decelerated in exports, industrial production and lending. Confidence is fading in an economic rebound this quarter, with investment banks from Morgan Stanley to Barclays Plc cutting their 2013 expansion forecasts.
Shen Danyang, a Commerce Ministry spokesman, said at a briefing today that China’s economic situation is stable while the trade situation is “grim” for this year. The economy grew 7.7 percent in the first quarter, less than the 8 percent median forecast in a Bloomberg News survey.
China’s property market faces the risk of a “bubble,” and it isn’t “light,” Wang Shi, chairman of China Vanke Co., the nation’s biggest developer, said at a conference in Shanghai on June 6.
“We expect property prices to start stabilizing by the end of the year as it takes time for the market to adjust to policies,” said Jenny Huang, an analyst at SinoPac Financial Holdings Co. in Taipei, who follows China’s economy. “This is not a good time for the government to implement additional measures as economic indicators still point to a weak economy. Growth is still the bigger problem.”
Elsewhere in Asia, South Korean producer prices fell for an eighth month as raw materials including crude oil declined. Hong Kong’s unemployment rate probably held at 3.5 percent in May, based on the median estimate of economists ahead of a report due today.
In Europe, German investor confidence probably rose in June, while inflation in the U.K. may have quickened in May, according to Bloomberg surveys. Turkey’s central bank will keep its three interest rates unchanged for the first time in 10 months, economists forecast ahead of a decision due today.
Inflation in the U.S. probably quickened in May from the previous month, while housing starts may have increased, surveys showed.