Changing gear

Following months of persistent decline, China's domestic A-share market seems to have bottomed out. A rally of late has been partly driven by the notion that policymakers are on the verge of shifting their economic tightening policy back into neutral, or even reverse.

Is such speculation warranted? And, if it is, does it mean the property market - targeted explicitly by the central government for asset inflation - could begin rising again, given improved liquidity?

Starting in April, the government began rolling out a series of tough measures to cool the real estate market and to address a wide range of social and economic issues such as rampant property speculation and a lack of affordable housing. As a result, prices stopped rising and transaction volumes in many cities have declined sharply.

Meanwhile, the equity market, which is driven by different dynamics such as the squeeze on profits, has also been plagued by these tightening fears. Yet, despite the government's restrictive policies on mortgages for second and third homes, commercial banks have quietly eased their lending criteria. This has allowed the domestic A-share market to come to life on the back of expectations that the tightening will end and a certain loosening may occur if the property market comes under greater pressure.

It can be argued that the softening property market along with the sell-off of A-shares shows that the tightening measures have worked. But, in my view, this argument does not hold water, for two reasons. First, the property market, which was already exhibiting signs of excess before the global financial crisis, saw significant appreciation last year. Second, excessive liquidity has resulted in irrational speculation on agricultural commodities such as green beans and garlic in recent months. The government has had to resort to heavy-handed measures to prevent the prices of certain products from rising.

However, even if the correction of the asset market has not fully run its course, policymakers' commitment to tightening may still waver. They could find other ways to improve resources allocation without using conventional tools such as interest rates.