Even with distortions that result from the timing of the week-long Lunar New Year holiday, Chinese economic data for February has been terrible.
Export growth tanked, retail sales slowed sharply, industrial output grew at the slowest pace since the global financial crisis, and manufacturing activity levels continued to contract while those for the services sector – the great hope for powering economic growth in the years ahead – expanded at the slowest pace on record.
It’s enough to make you wonder just how likely, let alone reputable, it’ll be that the economy will grow around 6.5% this year, a set goal for the government.
Amidst the raft of dire economic reads, there was one indicator that managed to buck the trend: urban fixed asset investment, led by an enormous 20.2% surge in spending from Chinese state-owned enterprises.
According to the China’s National Bureau of Statistics, investment rose by 10.2% in January and February compared to the same period a year earlier, bucking expectations for a deceleration to 9.5%.
Not only was it well above forecasts, it also marked the first month since June 2014 that the annual rate accelerated from one month earlier.
Fixed asset investment measures capital spending on physical assets such as real estate infrastructure and machinery held one year or longer.
Perhaps more surprising than the actual acceleration in spending was that it came from real estate investment, something that few would have expected – even with recent strength in house prices in larger cities – given the great swathes of unsold properties that litter smaller Chinese cities at present.
Helen Qiao, Xiaojia Zhi and Sylvia Sheng, Bank of America-Merrill Lynch’s China economic team, suggest that the rebound in infrastructure spending over January and February was primarily driven by an acceleration of real estate investment.
“Following five consecutive months of year-on-year declines, real estate investment growth rebounded to 3.0% yoy in Jan-Feb from -1.9% in December as home sales recovery continued amid a supportive policy environment,” say BAML.
In early February the PBOC announced that it will allow lenders to cut the minimum mortgage down payment for first-home buyers from 25% to 20%, taking the required level to the lowest level ever.
Alongside the sweetener delivered to first-time buyers, the PBOC also lowered the minimum down payment for those looking to purchase a second home, dropping the rate by 10 percentage points to 30%.
“The eased requirements will be for buyers in areas without the purchase restrictions that are applied in some of the biggest metropolitan areas such as Beijing and Shanghai,” the bank said in a statement.
Yes, with economic indicators elsewhere faltering and its foray into the stock market and undisputed disaster, the government has yet again turned to property market in an attempt to buttress economic growth.
As BAML points out, the scale and speed of the rebound in property investment has been breathtaking.
“The growth of new home sales in floor space and value terms surged to 30.4% and 49.2% yoy in Jan-Feb from 1.4% and 8.9% in December, helped by a string of policy easing to support the property market and a low base 12 months ago,” says the bank.
“Apart from the strong home sales momentum, there are also signs of improvement on the supply side. New home starts growth jumped up to 9.7% yoy in Jan-Feb from -6.5% in December. In addition, the decline of land areas purchased by property developers narrowed to 19.4% yoy in 2M16 from 31.7% yoy in 2015.”
Adding to the intrigue of the rebound, and casting doubt on just who these homes are being built for, BAML notes that vacant residential gross floor area (GFA) waiting for sale increased by a further 13.9 million square metres in the first two months of the year, adding to the 11.6 million square metres that it grew by in December.
That is residential floor space that has been built but not sold.
Given the glut of unsold properties in smaller tier-three and lower Chinese cities, it seems slightly odd, and perhaps to some disconcerting, that additional supply is yet again being added to China’s residential property market.
According to data released by the China’s National Bureau of Statistics late last year, unsold home inventory across the nation hit a record 686.3 million square meters as at the end of October 2015, up 17.8% on the levels of a year earlier.
The chart below, supplied by Deutsche Bank, reveals the growing level of unsold residential floor space seen in recent years.
Vivek Dhar, a mining and energy commodities analyst at CBA, wrote in January this year that the glut of unsold properties in smaller Chinese cities could take anywhere between two to five years to clear at the current pace of sales.
Even with the acceleration in sales at the start of 2016, there’s still increasing supply about to hit the market, casting further doubt on just how long it will take unsold inventories to clear.
While fine-tuning policy to help smooth out growth fluctuations is perfectly normal, and indeed proactive, it’s little wonder than many observers outside of China are concerned about the governments renewed push to spur on property investment.
Recent measures designed the support the property market have spurred on ridiculous price gains in some larger Chinese cities, amplifying talk that a property bubble – already deemed to be in place by many – is only getting larger. At the same time, a huge glut of unsold properties remains in smaller regional cities, ensuring prices remain under pressure.
The imbalances are building, and being fuelled by what some may deem to be short-term thinking.
As Chinese stock market investors found out first hand last year, when factors such as these come together, the divergence from fundamentals can have large, and costly, ramifications.
If a similar scenario was to play out in China’s property market, the economic ramifications would be near unfathomable.