Chinese policymakers have resorted to traditional levers to juice the economy this year: investment, public-sector spending, and monetary expansion.
Housing construction, real estate, and public services helped to keep headline year-on-year growth on an even keel at 6.7 percent in the second quarter, offsetting falling financial sector output. But there are growing signs the property market has slowed down, while imbalances in the sector are growing, according to analysts.
"As of June, China’s property market, which has largely been supported by government policy changes, is no longer delivering what the economy needs," wrote Bloomberg Intelligence economists Michael McDonough, Tom Orlik, and Fielding Chen in a research note today.
First-tier prices accelerated to a 2.1 percent month-on-month gain in June, while price growth in second- and third-tier cities slowed to 1.0 percent and 0.3 percent, respectively, according to Bloomberg data. Chinese authorities will release property price data for July on Thursday.
"The Goldilocks scenario for policy makers is effective controls calming speculative first-tier markets and continued rapid sales absorbing capacity and driving more construction in smaller cities," the analysts write.
However, analysts at Standard Chartered Plc suggest that the sector could be moving in the opposite direction from the best-case outlook. They argue that excess inventories and financing challenges, according to a proprietary survey of 30 unlisted developers in lower-tier cities, point to a cooling down of the sector in the second half of the year.
"Housing sales did not spike in our surveyed lower-tier cities in the second quarter; inventory digestion continues. Developers’ financing seems to be under stress again, and will likely weigh on their expansionary appetite," write Standard Chartered analysts, led by Lan Shen, in a research note today.
Their survey forms the basis of the bank's China Developers Sentiment Index (CDSI), which softened to 56.3 in July, marginally lower than 57.3 in January. But the index's momentum, rather than the level, holds the key to the sector's outlook, the analysts write. "We also note that the CDSI shows a clear three-year cycle span in each survey since we launched the index in 2010," they write. "The latest cycle appears to have reached a high in the first half of 2016; the lower July survey reading may indicate a potential cooling down of the property market."
Standard Chartered's survey also suggests a bifurcated outlook for the property market, as lower-tier markets didn't see a spike in sales unlike the top-tier cities. The analysts aren't notably bearish on the outlook for construction and housing prices in the months ahead. But they reckon rising defaults, from a low base, and divergent prospects for the top-tier cities and the rest will soften the property market, in aggregate, unless there's further significant policy loosening at the local government level.
Bloomberg Intelligence analysts suggest policy makers face significant headwinds in addressing imbalances in the sector in the months ahead. "China’s property sector may deliver the worst of both worlds: a speculative top tier that churns existing apartments without generating new construction, and moribund second and third tiers that leave the market swamped in unsold apartments."
Weaker housing-market sentiment, an indicator of softening industrial and consumption prospects, more generally, could exert further downward pressure on private investment, generating a obstacle for growth in the second half of the year.