China Faces A Housing Dilemma That Could Increase Risk Of A Hard Landing

Chinese President Hu JintaoChinese President Hu Jintao

Photo: Flickr/ !/_PeacePlusOne

The latest official statistics whichsuggested that home prices in China seemed to have bottomed out (in the near term at least), we thought that this puts the government in a dilemma.  The central government obviously does not want to see home prices rising again, but they are also worried about falling home prices and its impact on the economy.  Not to mention that corrupt government officials all have their wealth tied up to the health of the real estate market in one way or another.

The real estate market has been warming up in the recent months as local governments “fine-tune” policies and the central bank ease monetary policy:  many of the “fine-tunings” in the real estate market have been done at the local government level (obviously, local governments sometime don’t really care about what the central government wants them to do, as we mentioned a long time ago).  Thus the central government has repeatedly reiterated that tightening in the housing market will be continued, yet local governments have been doing other things.

On top of that, the People’s Bank of China have started easing monetary policy.  On the whole, we felt that the government has given up on rebalancing and has been reflating the economy in order to stabilise growth.

As Bank of America Merill Lynch’s David Cui points out:

We believe that, due largely to mixed signals sent out by the central government on local governments’ fine-tuning measures and the recent two rate cuts, sentiment in the physical market has turned decisively bullish. As a result, without new tightening policies, price momentum will likely continue to build.  We anticipated another round of tightening policies by the central government within six months. If the reported consensus is true, it may happen sooner than we expected.

While we are not sure when new tightening measures will come out and what further measures may be possible, for now the central government has apparently asked local government to withdraw all those “fine-tuning” according to Yicai

But just as we have pointed out, we do not see ways that the government can tighten one part of the economy (in this case, the real estate market) while at the same time stimulate the rest of the economy.  If the central government does decide that it is time to tighten the real estate market again, this could come in a rather unfortunate moment as the overall economy is slowing much more rapidly than both the government and the market previously thought.  Not to mention the impact of real estate market tightening on industries both upstream and downstream. 

We are not convinced that real estate market in China could have reached the bottom if the government loosen at this point, but tightening will certainly be bad for the overall economy.  BofAML agrees:

Should this happen, we see a higher risk of a hard landing.

What could the government do this time?  According to BofAML:

We consider the following measures to be possible policy options for the next round: 1) to tighten developers’ funding, e.g. more efforts to collect overdue taxes or to further restrict their funding channels including trusts; 2) to expand the scope of the real estate tax pilot test to cover more cities and/or more categories of housing; 3) to roll out capital gains tax on property investment. If this happens, there is more chance of a loosening in LGFV lending to try to hold up growth which will be a negative for banks.

This article originally appeared here: Chinese government may tighten real estate market despite economic slowdown
Also sprach Analyst – World & China Economy, Global Finance, Real Estate

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