The law of unintended consequences is something that Chinese policymakers are becoming increasingly familiar with.
The enormous stimulus splurge in the immediate aftermath of the global financial crisis, unprecedented in its scale, saw a huge increase in industrial and mining sector investment, laying the foundation for years of sector weakness that the country is still grappling with today.
And then there was the boom-bust rollercoaster ride in China’s stock market last year, fueled by government statements over the virtuous benefits of owning stocks. This, in part, was done to encourage more capital into the market, allowing firms to issue equity in order to pay down debt.
It didn’t end well.
And now it appears it could be happening again, this time in the property market.
In an attempt to rein in rapid house price growth in some of China’s largest east coast cities, something that followed interest rate cuts and loosening of buying restrictions earlier this year, regulators have tightened home ownership restrictions in recent months, seemingly a sensible approach given some of the enormous price growth seen over the past year.
At least 21 individual cities have done this, and the number continues to grow.
One look at the chart below from the National Australia Bank (NAB) underlines why regulators have taken action, showing the rapid price increase in the average sales price of residential property in many major cities over the past year.
However, while this is being done to cool the market, it may actually be having the opposite effect.
According to reports from Bloomberg, the value of new home sales surged by 61% last month, boosted by a torrent of buying activity as investors rushed to beat further restrictions being announced.
While only one month, it’s probably not what policymakers expected, nor wanted.
Even developers don’t appear to be concerned about the potential slowdown in the market with new construction starts, a lead indicator on property investment, jumping 14% in September from a month earlier.
According to calculations from Bloomberg, that was the fastest monthly increase since April.
Developers even bought 20% more land by total value from a year earlier, the largest gain in two years.
No fear at all. Full steam ahead.
The question now is will the heat in the property market persist, or is this the last salvo in the current cycle?
Gerard Burg, senior Asia economist at the National Australia Bank, thinks it’s likely to be the latter, thanks to tighter purchase restrictions and tougher lending standards.
“The People’s Bank of China has instructed banks to rein in mortgage credit and better manage risk. This may further cool overall investment in coming months,” he wrote in a note released on Thursday.
We’ll get further information on this topic when China’s National Bureau of Statistics releases new house price data for September on Friday, October 21.
In August, new home prices nationally rose by 9.2% from a year earlier, the fastest pace seen since January 2014.
This was led by price gains of 36.8%, 31.2% and 23.5% in Shenzhen, Shanghai and Beijing respectively.
You can read more from Bloomberg here.