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China Economy

‘Hard landing’ fears over ... but just when will China’s property bubble burst?

Latest growth figures set to reflect calm in the economy but asset woes still expanding

PUBLISHED : Friday, 30 September, 2016, 11:06am
UPDATED : Friday, 30 September, 2016, 10:49pm

Third-quarter figures due in the next few days are expected to reflect a calm few months for the Chinese economy despite simmering property bubbles in some cities, economists said.

With investment stabilising, industrial deflation easing and industrial production accelerating, fears about an imminent hard landing in the world’s second-biggest economy have abated since the summer, but warnings over frothy housing prices in major cities such as Shanghai and Nanjing have grown louder.

With the growth target for 2016 more or less secure, China’s monetary authorities are likely to stay prudent to keep property prices in check and to cope with possible rate increase by the US Federal Reserve later this year.

China’s fiscal authorities will also continue to loosen purse strings but an all-out post-crisis stimulus is off the table.

“Data for September will be similar to August”, when all major economic indicators were stronger than expected, said Suan Teck Kin, a senior economist at United Overseas Bank.

A low comparison base from last year when China was rocked by stock market and yuan exchange rate turmoil would also give this year’s growth figures a lift, he said.

There are already many signs of economic stabilisation.

Industrial profitability in August jumped 19.5 per cent as demand for inputs expanded; railway cargo transport, an indicator that Premier Li Keqiang famously trusted more than the headline GDP, returned to year-on-year growth in August after 31 months of declines; and the MNI China Business Sentiment Index, a privately compiled gauge, rose to the highest level in September in a year.

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Also in September, the Caixin manufacturing PMI edged up from 50.0 to 50.1, meeting consensus expectations of the Bloomberg median forecast of 50.1.

“It is the second strongest reading on the index during the past 19 months and a sign that conditions in China’s manufacturing sector are still gradually improving,” said Julian Evans-Pritchard, China economist at Capital Economics, adding he was hopeful that the official PMIs due on Saturday would also show signs of improvement.

Coal consumption at six major power plants also increased in September, and a Standard Chartered small business index pointed a clear recovery.

In all, economic activity has been so strong in China over the past few months that Beijing’s efforts to cut coal and steel capacity are facing resistance as steel mills and mines turn on idle production lines.

But even though slowdown risks have eased, the wild market swings are over, and a 54-month-long factory-gate deflation is nearing an end, Beijing has a new battle to fight.

“The focus of policymakers is the cooling of the property market,” Macquarie economist Larry Hu wrote in a research note.

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He said the central bank was unlikely to adopt blanket monetary tightening, but Beijing was likely to urge local governments “to curb property frenzy within their own territories”.

As Beijing continues to try to reduce housing inventory in small cities and towns across the country, home prices in big cities keep rising, with residential real estate in places like Shanghai, Nanjing, Xiamen, Suzhou and Hefei gaining 40 per cent in a year.

with residential real estate in places like Shanghai, Nanjing, Xiamen, Suzhou and Hefei gaining 40 per cent in a year

Wang Yong, a professor at the training institute of the People’s Bank of China in Zhengzhou, wrote in an opinion piece on the official Securities Times that China was seeing an extraordinary “deformed” growth in housing finance with almost all credit ending up in the property market.

“Housing bubbles are inflated further and may burst any time,” Wang warned.

Local government measures to restrict home purchases only amplified the panic buying.

“Risks are accumulating,” Bank of Communications researcher Liu Xuezhi said.

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Nevertheless, various banks, including Standard Chartered, Nomura and UOB, are forecasting an expansionary reading for September’s official purchasing managers’ index, putting the gauge in positive territory for a second month in a row.

“The rebound of momentum will continue into September but the longer-term story of a slowdown is unchanged,” Nomura chief China economist Zhao Yang said in a note.