Beijing likely to loosen its grip on the housing market as exports cool, analysts say
- Policies to boost housing could be forthcoming as China grapples with cooling exports, escalation in trade war
- Bank of America Merrill Lynch says intensified policy easing is possible in the third quarter
Beijing may begin to unwind restrictions designed to keep property prices in check as it battles to prop up economic momentum amid the escalating trade war, according to experts.
The property sector and related industries, which account for more than 25 per cent of China's gross domestic product according to CLSA, could be used to help offset the deteriorating trade outlook. The policy approach may be winning hearts and minds in Beijing as data showed exports contracted 2.7 per cent in April.
“When one of the three-horse carriages [of the economy] is not performing well, the rest will get more room,” said Mai Fan, chief executive officer of Kaisa Group. “We should take a more active role to contribute more now. After all, bringing in talent and infrastructure, all involve real estate.”
The three pillars of China’s economy are commonly referred to as exports, consumption and investment. Real estate is seen as an important component of investment, with housing sales totalling 13.37 trillion yuan (US$1.93 trillion) in 2017, equivalent to 16.4 per cent of GDP, according to The Handbook of China’s Financial System.
Analysts at Bank of America Merrill Lynch (BAML) said they expect the People’s Bank of China to begin cutting interest rates in quarter-point moves in September and December, followed by one further rate reduction in 2020.
The rate cuts, they say, will come on the heels of similar cuts expected by the Federal Reserve this year designed to shore up the US economy amid a weakening outlook and the sharp declines in US stocks.
“China will likely roll out more consumption stimulus and modest support on infrastructure and property investment,” said BAML analysts Helen Qiao and Xiaojia Zhito in a research note on June 5th.
However, under the scenario of full-blown trade war should the Trump administration impose an additional 25 per cent tariff on US$300 billion worth of Chinese exports to the US this summer, an intensified policy easing is likely in the third quarter, they said.
“Real GDP growth in China will likely slip towards 5.4 per cent year-on-year in the fourth quarter or 2019, (down from 6.4 per cent in the first quarter), inducing Chinese policymakers to adopt a sizeable policy stimulus package,” the BAML analysts said.
The intensified policy response is likely to include measures from the Ministry of Finance to support consumption, as well as tax cuts and subsidies for manufacturers and the front-loading of major infrastructure investments.
“What is unique in this scenario is that it would likely bring a general relaxation of property market controls such as purchase limits, price limits, sales limits, and mortgage limits, etc, with a very high level of autonomy granted to local governments to promote property development,” the BAML analysts said.
The expected policy easing would add fuel to a housing market revival that picked up momentum in March, buoyed by relaxed price regulations and easing mortgage policies in second-tier cities.
April data showed that the average land-auction premium – the percentage paid over the opening price – rose to 28 per cent, up from 7 per cent in December, according to the China Index Academy, which monitors 300 mainland cities.
Prices cooled slightly in May, with the average land-auction premium easing to 23 per cent, after Beijing blocked a number of Chinese developers that had been aggressive in land purchases from accessing the onshore bond market as a source of funding.
“Industry players in the mainland housing market would feel happier [in comparison to their peers in other industries], as current policies tend to be positive,” said Oscar Choi, chief executive of asset management firm OP Capital.
Property developers have begun aggressively rebuilding their land banks during the recent upturn in the market, reflecting improved sentiment from last year amid a clampdown on mortgage lending and pricing controls.
Kaisa, which is headquartered in Shenzhen, has budgeted 28 billion yuan (US$4.05 billion) to replenish its land bank this year, reflecting a rise of 50 per cent from 2018, according to the company’s chief financial officer, Edward Lau Fu-keung.
The developer said it also plans to speed more projects to market by the end of the year, with plans to introduce five new phases of residential projects in Shenzhen, up from two introduced in the first half.
Beijing however faces a difficult balancing act in guarding against too-rapid gains in home prices, while also ensuring that government land sales remain healthy.
Some cities appear to be adopting new policies to prevent irrational exuberance among developers bidding for land at government tender.
Authorities in Dongguan announced on Thursday that instead of awarding land to the highest bidder, they will award the site to the bid that is closest to the average of the tenders submitted.
