Front-loaded property boom makes outlook in 2017 more stressful
Residential sales to slow down from October, but China must maintain the right balance between supporting growth and restraining prices
Chinese policymakers are focused on maintaining economic stability ahead of a crucial Communist Party meeting next year, but economists are warning about too many support policies being front-loaded into 2016, and predicted more pressure in 2017, especially as the all-important property market weakens.
Andrew Batson, China research director at Gavekal Dragonomics, and also a senior non-resident fellow at the Paulson Institute, said three factors still formed the pillars of Chinese economic policy this year: the end of commodity deflation, loosened credit, and the property market’s recovery – and it’s the last of those that look to him as becoming “shaky first”.
“Many now expect October’s sales to have slowed noticeably, though sales growth should still remain fairly rapid for the rest of the year,” Baston wrote in a research report issued last week.
“The issue is more next year: so much has been front-loaded into 2016 that it is difficult to see how sales can continue to grow significantly next year, particularly as credit growth is no longer accelerating.
“A decline in residential sales in early 2017 is likely, though the most probable scenario is for construction and investment to slow only moderately, as falling inventories in coastal provinces still provide some incentive for new building, and policy curbs remain loose,” he added.
According to a recent media briefing by the National Bureau of Statistics (NBS), the property boom helped support gross domestic product (GDP) by roughly 8 per cent in the third quarter of 2016.
Analysts with China International Capital Corporation (CICC), however, say the contribution is from the real estate’s downstream service sector only, rather than real estate investment, which contributed around 12.3 per cent of nominal GDP growth, and 3.8 per cent of the real GDP growth in the third quarter.
“The potential adverse impact of a slower property market may be more pronounced on nominal growth than real GDP growth this time round,” said the CICC report, issued on Tuesday.
China’s home sales growth slowed sharply in late 2015, but rebounded after the December announcement of the government encouraging “destocking” by the market, and the subsequent surge in mortgage lending.
Sales jumped 34 per cent year on year in September after rising 20 per cent in August, not too far off the peak 44 per cent growth rate in April.
While acknowledging the property sector remains the major driver of economic growth, the government has to introduce cooling measures, said Batson in his research note, “to prevent political and financial risks of a property price bubble, that this credit surge has created”, as the growth trade-off gets harder.
Since late-August, 21 city governments have imposed new home purchase restrictions, including city-specific tightening in mortgage conditions.
China’s banking regulators have also started offering guidelines that mortgage lending growth should slow, and lending to developers through shadow banking channels should be stamped out.
The securities regulator has also banned bond issuance by developers, and has cast its spotlight too on refinancing approvals.
Official data is already indicating early signs of a property cooling as a result.
The NBS has just published a snapshot of house price movements in 15 tier-1 and 2 cities still seeing accelerating prices growth, that shows increases in new home sales moderated to an average of 1.9 per cent in the first half of October, compared with 4.4 per cent month-on-month growth in September.
Analysts with Bank of America Merrill Lynch raised the red flag on Monday about whether China’s property market tightening policies will “induce a sell-off and cause home prices to collapse”, in a research report.
“Global investors have largely downplayed the potential of a hard-landing in China as the most likely trigger of the next global crisis, and have supported China’s resilient official growth numbers and narrower capital outflow (until August at least),” the report said.
The analysts expect a 5-10 per cent decline in the number of home transactions in 2017, and downplay the risk of a sharp correction in prices nationwide, with selling pressure on both home owners and property developers remains relatively low.
“If the slowdown in residential fixed-asset investments growth jeopardises overall macro stability, policy makers will likely step up the pace of infrastructure investment to help ease the pain,” the report said.
Batson says that tacking between the priorities of supporting growth and restraining prices will “produce lots of policy fine-tuning and volatility”.
“But these tactical moves do not really change the overall strategy of prioritising growth, avoiding risky reforms and tolerating growing structural problems in banks and state-owned enterprises.”