Differentiated Policies Needed for China's Property Market

Stock market graph next to a Chinese banknote

By Dan Steinbock
While some observers claim China is heading for another property bubble, the big picture is more complex. There are signs of bubble formation in some cities and excessive inventory in others, but there is solid growth in many.
 
A few weeks ago, international observers declared that China’s real estate frenzy was back, as Shenzhen prices surged 50 percent. Others lamented that, while prices are soaring in some big cities, there are bubbles in other parts of the country.
At the same time, new construction, which had contracted dramatically in 2015, rose almost 14 percent early in the year. That was broadly seen as a signal of positive home-buying sentiment spreading from big cities to smaller ones.
So are China’s property values soaring or plunging? The only proper way to respond is to take a closer look at the forces driving the property market and the market itself.
 
From Boom to Contraction to Recovery
Currently, Chinese property values are fuelled by several proximate forces. Let’s start with regulatory shifts. At the peak of the property markets in 2013, regulators introduced a slate of measures to cool the market. By 2014, that contributed to the severe 7.8 percent contraction in property sales. Late that fall, regulators began to roll back constraints to support the sector.
After consolidation and adjustment in 2015, the sector began to recover with property sales growing 14.4 percent, while the ongoing year should see moderate growth, thanks to supportive policies, including reduced payment requirements and real estate transaction taxes.
In turn, these effects have been further amplified by macroeconomic policies and market developments – but in different ways in different areas.

Due to China’s massive population size and different levels of economic development and living standards, different regions require different policies. That’s a great challenge for policymakers.

 
In order to maintain adequate growth, macroeconomic policies have sought to support demand. Since 2014, the People’s Bank of China, the central bank, has cut benchmark lending rates six times, while lowering banks’ reserve requirements and injecting liquidity into the financial sector, hoping to maintain low borrowing costs.
Reportedly, these policies have fuelled demand, but not in the expected manner. Instead of more lending in lower-tier cities, banks focussed lending on first-tier cities. As a result, liquidity has not reached home-buyers in lower-tiered cities but has propped up prices in major cities.
The third force involves investors and markets. While the stock market burst in summer 2015, fixed-income securities have suffered all-time lows. With new liquidity but limited investment instruments, many investors have left markets for real estate. That, in turn, has contributed significantly to rising property prices, especially in the first-tier cities.

 
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About the Author
dansteinbock_webDan Steinbock is the founder of Difference Group and has served as research director of international business at the India China and America Institute (US) and a visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Centre (Singapore). For more, see http://www.differencegroup.net