Bid to shrink China’s property bubble ‘puts key growth driver at risk’

Beijing’s focus on deflating China’s asset bubbles and eliminating financial risks is hurting one of its key growth drivers, the property sector, analysts said.

Property attracts nearly one fifth of China’s fixed-asset investment and directly contributed to 6.5 per cent of last year’s gross domestic product, and is seen as one of the key drivers of last year’s economic stabilisation.

However, it could also become a victim of the central bank’s 10 basis-point increase in interbank money rates on Friday, the latest signal that China will turn to a tighter monetary policy this year.

“Mortgage rates face the risk of a large increase,” Jiang Chao, the chief macro analyst at Shanghai-based Haitong Securities, wrote in a research report.

“It, together with purchase restrictions in tier 1 and tier 2 cities, may lead to a continuous fall in property sales and a winter [for the] property market.”

China’s benchmark mortgage rate is 4.9 per cent, but banks still offer discounts in small cities.

“A reasonable mortgage rate would be about 5.5 per cent, about 100 basis points higher than the actual average at the end of September 2016,” Jiang said. He said this figure was based on a comparison with the 4.1 per cent coupon of 10-year China Development Bank bonds, which are backed by the government.

More than 20 cities have implemented restrictions on home purchases since October 2016, after a Politburo meeting highlighted asset bubbles and financial risks as areas of policy focus.

However, a large increase in fourth-quarter mortgage loans last year suggests that efforts to deflate the property bubble have so far failed.

Total mortgage loans almost doubled to 4.96 trillion yuan (HK$ 5.6 trillion) last year, accounting for 39.2 per cent of all new loans.

“The shift towards a tighter monetary stance appears driven by a desire to rein in credit growth and mortgage lending in particular,” Julian Evans-Pritchard, a China economist with Capital Economics, wrote in a note.

The median estimate by Bloomberg for new loans last month is 2.4 trillion yuan, close to the record high of 2.5 trillion yuan in January 2016.

“It’s only a matter of time before credit growth, a key tailwind behind the economic recovery in 2016, starts to become a drag.”

Property investment usually lags six months behind sales, which suggests that the headwinds could come as early as the second quarter.

Liu Xuezhi, an analyst with the Bank of Communications in Shanghai, said that the tightening was meant to help curb the property bubble rather than crash the whole market.

“China may adopt a differentiated credit policy on homebuyers and regions. Only speculative buyers and large cities would be affected,” Liu said.

A new growth target is expected to be set at the annual session of the National People’s Congress in March. The 2017 target is widely believed to be about 6.5 per cent.

Liu predicted that China would keep infrastructure investment growth at 17 per cent this year, while looking to boost service sectors like tourism.