Suddenly China's stock market has boomed. In November 2014 the Shanghai Composite Index was around 2700, and today the market has hit 4574.65, a record high in six years. With monetary policies easing and the official media backing, it is no wonder why the stock market is heating up.
It is noticeable that two groups of people, aside from institutional investors, have played a significant role amid this bullish wave. The first group is senior-aged Chinese women, or dama, who in Chinese tradition are treasurers of the family savings. They have abundant experiences dealing with family portfolios, and sometimes the performance of damas even outstrip that of a professional investment banker. The other group is the gen-90 young people (including me), who invested their generous amount of pocket money into the stock. Not only did the market accumulated mass leverage capital, it also absorbed a considerable proportion of household savings, both of which have contributed to inflated asset prices that have nearly doubled in less than half a year.
The bubble theory emerged again for China's stock market rush, although the bubble can only be observed after it collapses. It is reasonable to deem China's stock prices overvalued at present, taken China's not so satisfying first season economic data into consideration. So what will happen after the bubble burst is of greater concern. Of course, there will be people bearing the loss. But more importantly, what would the mass capital turn to invest after they escaped from the stock?
On March 30th, tax and rate cut for real estate purchase were finally announced in order to support China's housing market. With high existing inventory and newly added ones, this policy hasn't really taken its effect until now. However, apartment inventories are now declining at fast rate, and it is very possible that between June and September housing price in China's major cities will rise sharply. Traditionally China's individual investors favor housing investment more than stocks and bonds because of its immovable property nature. However, after the 2014 adjustment, real estate investments in China's minor cities are no longer safe. It is therefore a trend-to-be that the mass liquid capital out of the stock market will move into the estate market of China's mega cities in the second half of 2015, and a similar boom in housing price would be witnessed after the stock market bull makes its curtain call.
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China's stock market boom: what's after the bubble?
Pitfalls of China's New Model
对于中国来说，是三月份一个月会议。首先，中国共产党和中国人民政治协商会议州议会。然后，博鳌亚洲论坛，达沃斯相当于中国人。这标志着在经济意义上的中国新一年的开始，因为进入的政策和发展目标的信号在这些约定好释放。对于2015年，允许较低的增长速度，更多的结构性改革将成为“新常态”，并根据不同的经济部门，保持了7％的增长就足够让中国的十年末达到其目标而这样的年度目标，其实是充满挑战鉴于全球经济形势。更重要的是，新的经济增长引擎正式提出，如互联网产业和技术创新，皮带和道倡议连同其理事机构的AIIB（亚洲基础设施投资银行）。然而，过多的乐观情绪中引起这些镀金的前景和朗朗上口的口号，以支持新的中国模式已经成为微博上的hashtag。然而耐人寻味的新兴企业和互联网企业都，前提是之前中国的经济可能需要依靠 大量的 他们。
尽管许多人认为中国的繁荣的未来产业升级和创新，传统产业，其中许多是由房地产市场的增长和政府投资驱动的谎言，还包括大部分的GDP，并提供特别是在欠发达省份大规模的就业机会。在另一方面，创新的思维方式是根据openminded的教育，鼓励创造性和多样性栽培，而在中国的学术界正在进行的改革可能会达到这样的目标，希望只能由下一代（创“00”）。因此，创新推动成长的愿景应该，也不会注明唯一放弃现有的发展道路，这是投资驱动，政府指导的。相反，从传统行业的平稳过渡到先进的行业就必须政策优惠的老。其一，过去的房地产热潮和基础设施扩建繁荣能源，机械，原材料和家庭设施的市场。在这些业务人员需要重新培训的财政支持，进入新的行业，或将面临失业和工资缩水。其次，技术创新本质上齐头并进的工业活动，并创造性地解决环境污染，提高生产力，提高效率等，可根据内部政策支持范围。一切的一切，也有了解中国提出的新的发展道路很多陷阱。虽然巨大的潜力存在于中国的服务业和消费者的需求，新兴的小型或农业企业和互联网企业可能只是权宜之计，当投资和出口驱动的模式再也无法维持。这样一来，中国的审判日已经到来。
周一，3月30日，伴随着中国的财政部中国人民银行宣布新政策水桶中，除了削减在月初的速度支持住房市场。这包括削减交易税，并要求首付的住房抵押贷款。在财政方面，财政大臣娄肯定，更多的政府债务互换，可能在大约十万亿日元的大小，将全年实行，并且将有大约七万亿日元批准的基础设施投资理财的2015年。我的许多同事，谁比我年长，并一直在做经济研究工作多年，发现今年的政策方向类似，在2009年。 从那时起， 高通胀和咆哮的房价主义及其对扩张性政策和热心市民的反感对不同成长之路。然而，中国的新常态在于较低的增长速度温和通胀和健康的发展道路的精髓。这些后果。而类似的策略重新出现，它们只是旧装置到一个新的末端。
Deflation of the Chinese Characteristics
China's February statistics are all out today. CPI rose to 1.4% from 0.8%, not adjusted for Lunar New Year's price effect. PPI negative growth deteriorated to (-)4.8%, indicating shrinking industrial activities for the 36th month. Growth in total volume of consumable retail, in added value of above-acale industries, in fixed assets and real estate investment all fell considerably and were around 1% lower than expected.
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| Picture Source: Baidu |
With the deeply-rooted tradition of seeking financial stability, deflation in China will cause much more severe consequences than on other economies. As a market economy built on five-year plans, which is hard to not ignore each and every aspect of the economy, industries struggle harder to recover from the business cycle mechanism and obsolete business funded by state capital may grow to big to fail. Household consumption would also fall sharply during deflation and over-thriftiness will dominate again, both due to shrinking returns on property investment (over 70% of Chinese household wealth) and precautionary worries on rising medical and welfare expenses. Asset prices would be tangled into a downward swirl driven by pessimistic expectations and, because China's social insurance funds were largely invested into the stock market, aging problems would intensify and arouse social upheaval. More importantly, no structural reforms could continue delivering positive support for growth under deflation, let alone business innovation and emerging entrepreneurship.
Preempting deflation in China's situation requires not only monetary easing or targeting on inflation. Also a strong and clear policy attitude should be expressed. Although allowing a slower growth rate benefits the economy from a structural perspective, public policy should not beat off the bushes and only keep "calm" faced with downward pressure. As the former chief economist of the World Bank Justin Lin Yifu puts it, China still has the potential of annual growth rate at 8% for the next two decades based on his model. Given China's rather low GDP per capita and capital resources per person, this is a necessary rate to ensure the general welfare improvement of the Chinese as well as China's evolution to a developed economy. According to Mr.Lin, fiscal investment on infrastructure should remain the foremost engine for growth and help facilitate reforms in areas such as the financial market. It is noteworthy that many rural areas in China remain underdeveloped and many agricultural facilities are obsolete, both of which yearns for fiscal support. China's economic growth still abounds with more opportunities than challenges. However, lack of policy attention on these under-exploited potentials will hurt more than deflation.
China's Consumer Demand: A Caged Growth Engine
Last year China failed to achieve its GDP growth target for the first time entering the new century. The authority explained that lower growth is beneficial for structural reform in the long run: consumption, along with emerging enterprises that creates consumer demand, should dominate China's economic growth to replace investment and net export in the next decade. Whatever such economic new normal is visioned to be, the January data cannot disguise the fact that China is on the edge of deflation. Besides another negative PPI for the 35th month and shrinking trade statistics, the January CPI is 0.8%, the lowest in the past five years. Considering the fall in oil price, this is still a dangerous figure indicating weak domestic demand, especially when fresh, usually against-season grocery and transportation tickets are much more expensive around the new year season. Another compelling phenomenon can be observed in most cities, where a considerable amount of small retail shops, department stores, middle-priced restaurants and online shopping logistics were either closed or their business hours were shortened half a month before the Spring Festival holiday starts. Last year, on the contrary, these business worked extra hours during the holiday season. The decline in consumer spending is now hard to be neglected.
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| Source: Baidu |
Why do consumption fall when the government is actually encouraging spending? Some blame on the anti-corruption initiative that damaged related business supported by public funds, which is an unwarranted excuse made up by those at stake, because the essence of the so-called growth and structural reform just lies in better government transparency and improved state enterprises efficiency. But why do commonplace households cut their spending, too? Stumbled economic growth plays a role in, yet what makes consumer demand even more vulnerable to recession is the extra cost of spending in China. Yes, there are "fifty shades" of the tax policy that abuses Chinese consumers that eventually makes their money flee away from domestic market.
For one, imported consumer goods are subject to an average of 15% custom tax, 17% value added tax and 30% consumption tax for recreational goods (cigar, liquor, cosmetics, and vehicles). A typical Chanel lipstick sold in Beijing charges 20% more than that sold in Manhattan (NY consumer tax included), and the same bucket of milk powder charges around 30% more in China than in Australia. Since cheaper domestic substitutes are exposed to severe quality problems, the business of "online buyers" emerged. From luxury products to baby food, from Japanese electronic appliances to Laduree's Paris-limited snacks, there are always Chinese people living abroad to purchase these products and sell them online to Mainland China. They either physically bring goods back to China, or use shipping agencies for tax exemption. Even with arbitrage, the price domestic consumers pay is significantly more reasonable. When China's economy was in boom, some better-off people may directly buy domestically, and many of them use cash coupon of large face value (such coupon is now forbidden under the anti-corruption regulation) to make purchase. However, due to economic malperformance and policies suppressing property market growth, household wealth of the Chinese shrank, and they became more prudent to buy only at the lowest possible price. The three new engine for China's economic growth is given by officials as domestic consumption, infrastructure investment and foreign investment. At least for now, the first engine remains a fanciful blueprint rather than a pragmatic instrument unless there are tax cut for imported goods and severer quality supervision for domestic products.
Another lifelong worry that prevents the Chinese from spending their savings is the lack of social and medical welfare. With no social safe net, spending today means potential life threat tomorrow. Even the richest group of people have these precautionary concerns, and they'd rather invest over 85% of their wealth in the real estate market for financial stability after retirement. Many young couples have to afford the medical and nursing expenses of four parents (usually from rural area, not eligible for free medical insurance) while raising their children. Therefore, the fiscal policy should create purchasing power for households on a life-quality-improving purpose. Most directly, the personal income tax should be collected on a family basis instead of individual by individual to account for average disposable income among family dependents. Tax exemption can also be practiced as an award for those who promoted social good, eg. micro-business entrepreneurs, blood donators and (dependents of) organ donators, organic agriculture farmers, etc. With a distorted tax structure, the Chinese consumer demand is a caged tiger, niggardly fed by the zoo keeper, highly expected for outperformance in the market circus, and secretly spoiled by the exotic speculating audience. Should it be unchained and appropriately stimulated, this could have been a potent beast to combat deflation and a beauty to attract foreign business investment.
RMB Internationalization: Implications for Exchange Rate
Stepping into 2015, Renminbi has made several concrete achievements toward the realization of internationalization. According to SWIFT, RMB has become the fifth most frequently used currency in the global market in terms of its share in international payments. It is also noteworthy that the total value of payments transacted in RMB has boomed by 102% within 2014, whereas other currencies only grew on average by 4.4%. Meanwhile, the International Monetary Fund (IMF) will discuss the inclusion of RMB into the SDR basket in November, when the selected group of currencies is re-evaluated every five years. On 21st January, the PBoC has agreed with SNB to establish yuan clearing and the RQFII (RMB Qualified Foreign Institutional Investors) pilot region in Switzerland.
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| Picture via Google |
We saw RMB depreciates drastically towards USD in the past two days, which forms the weak expectation on future RMB rate as shown on RMB one-year NDF. In the long run, however, there is limited space for yuan's further depreciation. Although cheaper yuan stimulates export, to a greater extent China suffers from capital outflow. The PBoC has practiced reverse repo this week to keep stable flow of liquidity, and more discretionary guidance in the currency market are possible after the Federal Reserve announced its interest rate decision. In general, there would not be radical reflation for RMB to stimulate growth in 2015 even if the Fed practices interest rate increase. Instead, yuan will seek a rebalanced rate with dollars in a gradual manner so as to promote its long term goal of becoming an internationalized reserve currency.
After ECB, how will PBoC react to worldwide combat against deflation?
The ECB has just announced its huge QE program with monthly bond-buying of €60 billion, beginning from March until September, 2016. Within the past week, central banks of Switzerland, Denmark, Turkey, India, Peru and Canada have also announced interest rate cut. With IMF expecting a lower global growth rate for 2015 and 2016, deflation has become the foremost threat against economic development as well as the major target for monetary policies.
China's central bank PBoC, however, remains quite recently. Premier Li Keqiang also re-emphasized China's monetary discretion in Davos that no huge stimulus would be practiced, despite that the newly released CPI was lower than expected and 2015's GDP growth has achieved record low. Deflation also haunts China, yet what's PBoC's plan?
I still regard cuts in reserve ratio and interest rate as large probability events for the first two quarters of 2015. China's mainstream media has brainwashed the market that any expansionary measures from PBoC are huge incentives and "money-printing". In fact, these are merely rebalancing approaches to keep price stability for China at this stage. With increasing risks of deflation (adjusted for fall in oil price), I also expect more deregulation measures in the real estate market, such as tax cut and less purchase restrictions, to coordinate with PBoC's appeal for commercial banks to improve housing mortgage service with higher approval rate. China's economic malperformance in 2014 were largely due to stalled growth in real estate investment. And China's property sales were largely correlated with bank's ability to issue loans. Premier Li explained on World Economic Forum that China's housing market demand remains high from a long-run point of view, which indicates the government, including PBoC, will take measures to preempt potential recession in this sector.
While there is no need for PBoC to follow ECB's anti-deflation practices such as QE, China's central bank has to implement monetary expansion to the extent greater than the so-called targeted easing in 2015. There might be new policy tools, but PBoC should address the overall deflationary pressure existing in the market and boost the confidence of Chinese households and investors.
All pictures from Google
China's New Economic Normal Backs O’Neill’s Optimism
At
college, I have been dedicated to studying Jim’O’Neill’s vision of BRIC
economies. The seeming under-performance of these four emerging markets now seem
to pale into insignificance compared to U.S. economic recovery and the ambitious
Abenomics. However, Jim’O’Neill staysbullish on China in the year 2015. His article listed three reasons to be
optimistic about China: the collapse of oil price will boost the purchasing
power of the Chinese, deflationary pressure renders monetary expansion
expectable, the presumed fall in real estate price is unlikely to cause credit
crunch and will instead stimulate the sales of housing. While Monsieur O’Neill’s
confident depiction of China in 2015 is overall realistic, I’d like to offer my
alternative point of view on China’s prospect under the "new normal".
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| Shanghai's Bund Bull Source: Google |
China’s
December CPI and PMI have both hit new low, indicating increasing risks of
deflation. Stimulating measures such as cut in interest rate and reserve ratio
are thus expectable in the first quarter of 2015. However, the long-term
strategy of Renminbi internationalization requires PBoC’s discretion to stabilize
domestic capital market and exchange rate. Thus targeted easing policies, whose
importance has been re-emphasized in PBoC’s annual report, are more foreseeable.
In addition, fiscal stimulus will play a larger role to push the economy closer
to the target. Approximately ￥7 trillion infrastructure
investment are initiated to begin construction in 2015. This fiscal expansion
in general serves to rebalance the economy by modernizing the vast rural areas
in less developed provinces and renovating obsolete urban public facilities. It
also corresponds better to China’s proposed new normal economics, which
suggests better public welfare, more environmental-friendliness, and a healthier
economic structure that emphasizes fairness and equality. Therefore, China’s
growth in 2015 lies more on the fiscal side. The monetary authority will
implement some expansionary measures, but the magnitude could hardly resemble a
quantitative easing equivalent.
On
the other hand, one should no longer view China’s real estate market an
integrated subject matter from 2015 on. For extra large cities, Beijing,
Shanghai, Guangzhou and Shenzhen, year-end statistics of 2014 reveal an average
of 10% growth in housing price, while the growth rate has shrunk a little
compared to 2013. Major cities, such as Tianjin and Nanjing, witnessed moderate
or zero growth in property price. The rest of Chinese cities experienced
different degrees of recession in the housing market. However, Monsieur O’Neill’s
idea that lower housing price increases sales is unlikely in the last two
scenarios, where real income growth stumbled as a result of diminishing household
wealth and bank’s growing reluctance to approve mortgage loans. The actual
rationale behind the role of real estate in China’s economy involves government
revenue through land auction, which is the greatest part of fiscal income for
all local governments. Rising housing price funds fiscal spending, backs up
banking leverage, and supports the growth in related industries and service
sectors. By looking at the successful land bids in 2012, whose floor price in
Beijing’s case is at least 5% higher than current price, one can infer the
interval of housing price growth in 2015 with confidence, because estate
projects built on these bids will be available for sale next year. The expectation
of growing estate price boost household confidence, dispels loan provider’s
circumspection, and increase business opportunities in construction-and-home-related
industries, thus improves the economy as a whole.
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| Guanlan Jiayuan, Beijing's most upscale estate to be sold in the second quarter of 2015, is now under construction. The most expensive apartment is estimated to be worth ￥70 million, and average price per square meter amounts to ￥165,000. Source: Baidu |
Due
to asymmetric information in the stock market and the lack of social-wide
pension system, housing is the most secured and inflation-proof type of
investment for ordinary Chinese families. China’s real estate price has been
increasing at an incredibly high rate for the past ten years, corresponding to
China’s GDP growth and Chinese people’s income growth. However, as China now
allows for a lower growth target, housing price, along with related financial
assets, will continue to step higher but at a moderate and sustainable pace.
The same description can be applied to China’s new normal economics as well. With
fiscal stimulus underway at the same time, there is enough reason to be bullish
on China and its contribution to the global economy.
The End of Taobao Bargain? China to Tax Online Business in New Tax Law
China's revised draft of tax administration law (Chinese version here) has been put on public notice and will be voted on People's Congress on March. A newly created Article 19 requires that online store owners must clearly exhibit tax registration information on their web-shop's home page. This means individual online shops, particularly Taobao sellers, will be officially taxed.
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| Source: Courtesy Google |
On the other hand, Taobao is almost a perfectly competitive market for common goods and services. Both the entry requirement and maintenance fee are low for sellers, and there are about 0.6 billion active buyers who can choose to purchase the same good, say a Kanebo collagen facial mask, from hundreds of different sellers. Therefore, there is little chance of huge arbitrage and sellers sometimes pay extra to Taobao to promote their product and increase sales. If online business are taxed in value added method, these shop owners will suffer from both squeezed profit and discouraged buyers. It can be expected that one-third of the current Taobao sellers and 10 percent of Tmall store owners will disappear.
However, taxing on Taobao coordinates with business regulations that supervise online transaction, and can address the problems arising from Taobao's popularity. Forgery and products with inferior quality than stated are common phenomenons in today's online business that people trade on a buyer beware basis without standardized regulation. Illegal products ranging from anesthetic drugs, banned weapons to pirated publications can all be found on Taobao by typing specific jargons. For better protection of consumer's rights, Taobao certainly needs such a detox that promotes better transparency and legal activity. It also motivated store owners to improve customer service and strategize better risk management.
At the same time, not all discouraged Taobao dealers will exit from online business. Another regulation vacuum exists in China's online business administration where private social network, namely the WeChat, has become another responsive platform for commodity trading. Many Taobao sellers keep in touch with their VIP buyers through Wechat contacts and they transact directly through Alipay or bank transfers. It might be possible that more exclusive social network apps in favor of online trade will be developed for tax evasion purpose. This negative effect should also be considered and preempted before the proposed tax law takes into effect hopefully in 2016.
Observing the "runway effect" in global markets
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| Dior Tokyo Pre-fall 2015. Photo: Courtesy Dior |
A successful fashion designer identifies the future trend several seasons ahead to have their spring-summer collection presented on the previous year's September fashion week, so do their bosses, who normally have already planned the business for the next five years or more. From 2008 to 2012, China's miraculous economic growth and inflow of capital, driven by Beijing's discretionary expansion, ignited middle-class Chinese's passion for luxury goods. By offering seasonal collections tailored to the Chinese aesthetic, brands earn. Most importantly, they have to launch their collections earlier than leading economic indicators ever show market optimism. Or they fall behind. Abenomics, though not showing strong signs of recovery, is such a policy package that indeed does the right thing (re-evaluating Yen's rate, structural reforms, better workplace welfare for women, anti-deflation, etc.) and it has much potential to successfully boost Japan's economy. There's no risk for Dior and Raf Simons to have shows in Tokyo anyway, yet this cultural tour may serve to please their prospective consumers. The same bet was made by Chanel in Salzburg and Valentino in New York at this moment, taken into account ECB's potential monetary stimulus and America's strong economic recovery. Sometimes, the runway is also a leading economic indicator, and perhaps the most stylish one.
Setting the tone for China 2015
If you are in my WeChat sphere you would know that I have been both busy and excited since last month. I've been chasing this chance for so long and that's why I haven't been posting often from September. I got an assistantship with an awesome professor and I will formally delve into China's economic future in the mid-long term (new normal, mid-high growth, structural reform, whatever it is called). So I will constantly write my own version of economic reviews for China and other related regions and post them here. If you are interested in China's financial market and macroeconomic policy, you can find some useful facts and ideas here. All the ideas her are inspired by Prof. Ju and the misconceptions are of course mine. : )
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There are a lot to expect from this confidential conference. First, China's GDP growth target. The goal should still be set anywhere above 7% to ensure a doubled gross domestic product by 2020, but may be below 7.5% for 2015, allowing space for the market to digest the economy's downward drags. The reality is, China could no longer sustain its previous growth model driven by low labor costs, huge fiscal expansion and state sector investments, while the new normal emphasizes steady and moderate growth fueled by household consumption, business innovation and the development of the service sector.
Second, PBoC's monetary policy. Unfortunately, Chinese central bank's qualitative easing measures, namely the PSL(Pledged Supplementary Lending), the targeted interest rate and reserve ratio cut, didn't establish a valid market expectation thus failed to realize its assumed goal. The overall interest rate cut on 22nd November embarked on a new round of monetary expansion, despite PBoC's iteration of its prudence. We can expect a reserve ratio cut after the conference concludes on 11th and before January.
Third, the risks and opportunities. It is interesting to observe an unusual upsurge in the Shanghai Composite Index that rocketed over 3,000 on Monday and plummeted back to 2,800 today. This fluctuation was partially accredit to the Shanghai-Hong-Kong Stock Connect program, and greater volatilities will become a normality for China's stock market after the short selling mechanism and T+0 transaction is permitted next year. On the other hand, China's real estate market has bottomed out, with Beijing and Shanghai showing positive growth in housing price. This lowered the risk of massive credit crunch in China's banking system, which has been deleveraging since 2012. 2015 may be another booming year for real estate investments, similar to that of 2007 and 2009, when the business cycle has entered the expansion phase.
In short, my tone for China's 2015 economy is reserved optimism. The market reform in state sectors and the financial market liberalization will contribute to higher capital efficiency for the economy as a whole. Online business and banking, namely Alibaba's Taobao and Alipay, still has potential territories to explore, by targeting on China's mass populated senior citizens and importing authentic foreign labels to set up official web shops on T-mall. Nonetheless, the excess capacity in China's traditional industries forms a barrier to industrial upgrade and innovation. The coming five years for China is critical. To find the new engine for economic growth determines if China would fall into the middle income trap, or successfully evolve into Asian's largest developed country.
OPINION: China’s July Economic Data Reveals Market’s Diffident Expectations
An array of economic data for China’s economy in July
indicates a moderate slowdown in investment and production, despite the multiple
government and monetary stimuli taken at the same time. Growth of M2 was 13.5%,
lower than the corresponding period of last year. The data also demonstrated
discouraged corporate and social financing.New loans increased in July were
only ￥385.2 billion, falling
far below the expected ￥700 billion as well as
previous month’s ￥1.08 trillion. This
figure has thus become the lowest since 2009.
Sheng Songcheng, PBoC’s director of Statistics Division,instantlyclarifies
the steep fall in M2 growth as attributable to stricter regulations on
interbank lending and the decreased amount of funds outstanding for foreign
exchange. He also cited historical data, which shows July tends to be a month
of shrinking lending statistics, as well as June’s data, that may somehow
overdraw July’s lending potential.
However, the sudden fall of banking statistics ismore of an
indication of the market’s diffidence to invest, due to rising risks in
property market and credit defaults in the banking system, although these risks
are still controllable at current stage. A mismatch between demand and supply essentially
discouraged investors and banks from loans. Real estate projects are held back
because of housing market’s malperformance, which is partially due to homebuying
and mortgage restrictions. Small and micro businesses are faced with excess
capacity, and existing venturessuffer from decreasing business orders in the market
for property construction. Banks lowered risk preferences and theyhesitate to
loan out even with abundantliquidity. The biggest threat still lies in the housing
market thataccounts for one fifth of the economy, which has been experiencing
cyclical falls since the beginning of 2014.
To underpin the descending housing market, Ministry of
Housing and Urban-Rural Development has acquiesced in cancelling restrictions
on home-purchaseand mortgage for many non-mega cities. At monetary level, the
PBoC has showed full discretion in releasing expansionary forward guidance and
the speaker of PBoC pre-disclosed early statistics of August to demonstrate
economic stability. While PBoC’s targeted easing schemeto support fiscal
expansion is yet to yield concrete growth, the oriented nature of such policy
behaves as a disincentive to and crowds out the real economy, as the real cost
of borrowing remains high. If the third quarter growth rate falls below 7.6%, the
reputed economic microstimulation
would expect a transformation into moderate, or stronger, incentives. An
all-round reduction in the reserve requirement ratio, loan-to-deposit ration or
the interest rate is to be anticipated, along with an overall liberalization
for transactions in the property market.
OPINION: 2014 Third-Quarter China Housing Market Outlook: Mega Cities Show Signs of Recovery
China’s housing market,
swept by the gloomy sentiment for over half a year, revealed a silver lining in
July. Two leading mega cities, Beijing and Shanghai, have witnessed an increase
in the trading of both new homes and secondhand houses for the first time since
March 2014. For Beijing, trade volume of residential housing stocks rose by
22.49% compared to June, and there are 200 more secondhand homes traded in the
first eight days of August than that in July. Historical data in 2008 and 2011 suggest,
could the trend of growing trading continue for two consecutive months, housing
price will bounce. The market phenomenon, occurring each year and often
referred to as “Gilded September and October”, is also expected to boost
selling as homebuyers tend to settle their deals before the year-end. Therefore,
at the end of the third quarter, China’s mega cities will see busier
buy-and-sells in the housing market, while experiencing a mild increase in the
average price.
First, careful scrutiny
into several housing-market-crash theories revealed incoherence with reality.
The average housing-price-to-income ratio in China’s large cities is over 10, which
is far above the normal interval between 3 and 6. However, a Chinese young
adult’s income is not the only source of financing for homes. Deeply rooted in
most Chinese parents’ minds are that, owning a house is a symbol of happy
family and any thriftiness for the sake of home buying is worthwhile. A newly
married young couple are able to afford up to a 70% down payment on their
housing mortgage loan by using the lifelong savings from their parents and
grandparents. Such traditional ideal also prompted speculators to hoard housing
stocks and seek arbitrage opportunities when housing price rises. This leads to
an observed excess supply of housing stocks in many cities. Commentators fear
that the surplus will eventually bring down housing price, and intensify the
risk of housing market crash and credit default. However, new residential
projects are banned and conditionally infeasible in hub areas of mega cities,
such as Beijing’s central districts inside the Second Ring Road. Thus, it is
equally non-negligible that the temporary surplus in housing stocks is
potentially digestible and even insufficient to keep up with the huge
urbanization scheme in progress.
From a broader
perspective, the macroeconomic condition has twisted the negative expectation
against housing price since June. The 7.5% annual GDP growth is not only an
economic plan, but also a political promise for Beijing to realize its goal of
doubling the GDP by 2020 set by the 18th Third Plenary Session. This
requires rigorous fiscal expansion in the remaining two quarters to offset the
downward pressure on investment growth. Land-based finance is the major
fundraising approach for local governments, whose land revenue is directly
related to the growing housing price. At monetary level, PBoC (People’s Bank of
China) partially lowered the reserve ratio requirement twice, and released ￥1 trillion liquidity to China Development Bank using
PSL (Pledged Supplementary Lending). Correspondingly, previous limitations on
housing market transaction were loosed. For small and medium cities,
property-purchasing restriction was cancelled in succession. Discount rate for
housing mortgage reappeared in Beijing and Shanghai to support households’ demand
for home purchasing, which has been oppressed due to higher borrowing barrier
in the past three years. It is a rational estimation that any administrative
intervention against home purchasing would quit by the end of 2015.
As a conclusion, both
market data and poly forward guidance bode well for resurgence in Beijing and
Shanghai’s housing market. Increasing transaction will be the trend for the
third quarter, and housing price rally at the end of October is a large
probability event.
