China Slowdown Seen Forcing Wen’s Hand on Property Curbs
Gross domestic product expanded 7.7 percent in the second quarter from a year earlier following an 8.1 percent increase in the first quarter, according to the median estimate of 38 economists surveyed by Bloomberg News before a report tomorrow.
The slowdown may test Wen’s pledge to sustain controls aimed at cooling home prices as he seeks to buoy growth ahead of a once-in-a-decade leadership transition later this year. China’s efforts to prevent a property bubble limit its policy options as the European debt crisis curbs exports and contrast with the Federal Reserve’s attempts to jump-start the U.S. housing market amid a five-year slump.
“It will be extremely hard to stimulate a strong rebound in the economy without involving the property sector,” said Mark Williams, Asia economist at Capital Economics Ltd. in London. “They may have to look again at their property tools.”
While China’s leaders probably want growth of around 8.5 percent for the world’s second-biggest economy, they may fail to exceed 8 percent without contributions from real estate, said Williams, who previously worked for the U.K. Treasury. “It would only take a shock from Europe for things to suddenly look a lot worse,” he said.
Leaders have vowed to maintain curbs on the property market even as they reduce broader borrowing costs. When cutting interest rates last week, the central bank widened discounts permitted on most loans to 30 percent of the benchmark while leaving those for mortgages unchanged, effectively ending preferential prices for homebuyers.
South Korea’s central bank today in a surprise move cut borrowing costs for the first time in more than three years after the Finance Ministry last month lowered the nation’s growth forecast. The Bank of Japan unexpectedly increased its asset purchase program for a third time this year, while cutting the size of a credit loan facility.
China’s stocks fell today as lower profit forecasts from companies including Cosco Shipping Co. to Dongfeng Automobile Co. underscored concern the nation’s slowing economy is hurting earnings. The Shanghai Composite Index dropped 0.3 percent at the 11:30 a.m. local-time break.
Wen has tolerated some piecemeal measures to support property. They include the introduction in May of home subsidies in the eastern city of Yangzhou, discounts on mortgages for first-home buyers in Beijing and raising the tax threshold on purchases of some homes in Shanghai. About 30 Chinese cities have issued “fine-tuning” policies since the second half of 2011, according to Centaline Property Agency Ltd.
Property-generated demand for goods including electric machinery and instruments, chemicals and metals account for more than a quarter of China’s final domestic demand, according to an estimate by UBS AG.
“Significant loosening in the property market looks unavoidable in order to entice developers to pick up investment,” Citigroup Inc. analysts led by Hong Kong-based Oscar Choi wrote in a July 11 research note. “Potential powerful measures” include lower down-payment ratios and wider coverage for a public housing fund that provides low-interest mortgages, they said.
Promoting investment growth is now the key to stabilizing China’s economic expansion, Wen said in a statement July 10. The remarks followed comments he made two days earlier on an inspection tour in the eastern province of Jiangsu that the government would intensify fine-tuning of policies.
In the U.S., minutes of a June meeting of Fed policy makers said that the housing sector remains “depressed overall” even after some improvements in sales, construction and prices.
A few members said the central bank will probably need to take more action to boost the labor market and meet its inflation target, according to the record of the Federal Open Market Committee’s June 19-20 gathering released yesterday in Washington.
China is already loosening restrictions on lending to local government financing vehicles that borrowed record amounts after the global financial crisis, confirming Wen’s determination to stabilize growth through infrastructure investment, said Shen Jianguang, an economist at Mizuho Securities Asia Ltd. in Hong Kong.
Wen is pursuing the strategy as excess capacity pervades some industries and residential developments sit empty. The risk is that the focus on building more infrastructure exacerbates China’s reliance on investment-led growth because “investment is pointless without end demand from either consumption or exports,” said Cullen Thompson, a managing partner in New York at Bienville Capital Management LLC.
The nation has ample room to build more infrastructure and fixed-asset investment projects because its capital stock per worker is only 6 percent of that in Japan, said Michael Buchanan, chief Asia-Pacific economist at Goldman Sachs Group Inc. in Hong Kong. Still, the increase to 190 percent from about 150 percent since 2008 in the ratio of total credit to gross domestic product will constrain the pace of any easing, Buchanan said.
The government has signaled any stimulus this year will be on a smaller scale than in 2008, when policy makers unveiled a 4 trillion-yuan plan ($586 billion at the time). Even so, authorities may be following a similar playbook as they accelerate construction approvals, including permission in May for 134 billion yuan of new steel factories.
“The current slump is largely caused by the over-stimulus in 2009 and now they are repeating the same strategy: Quench thirst by drinking poison,” said Junheng Li, founder and senior equity analyst at researcher JL Warren Capital LLC in New York. “With even more limited policy flexibility and declining returns on investment, obviously the results will be worse.”
Tomorrow’s data may also show industrial production growth picked up to 9.8 percent in June from a year earlier, while retail sales slipped to 13.4 percent, according to surveys of economists. Fixed-asset investment excluding rural households is estimated to slow to 20 percent in the first half from a year earlier, another survey showed.
New-home prices rose for the first time in 10 months in June, according to SouFun Holdings Ltd. (SFUN), owner of the nation’s biggest real-estate website. Beijing’s Haidian district sold a residential land plot at a record price July 10, according to Bacic & 5i5j Group, the city’s second-biggest real estate agent.
Shares of property developers listed in China increased the most in four months on July 6, the day after the rate cut, with China Vanke Co. (000002), the biggest listed developer on the mainland, climbing to the highest since November 2010.
Wen’s rhetoric is at odds with the gains. China must “unswervingly” continue its property controls and prevent prices from rebounding, Wen said in a July 8 report by the official Xinhua News Agency. Local governments that introduced or covered up a loosening of curbs on residential real-estate must be stopped, and “we cannot allow prices to rebound, or all our efforts will come to naught,” he said.
With this year’s leadership transition, the Chinese government “will not ignore growth risks,” Barclays Plc said in a research note July 5.
“China’s priorities have been to contain property prices and that has limited its ability to aggressively stimulate the economy thus far,” said Andy Mantel, founder and chief executive officer of Pacific Sun Advisors, an asset manager in Hong Kong.
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