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Andrew Polk
Andrew Polk
Associate Economist


18 Aug. 2014

The China Weekly: Your “Eyes and Ears” on Important Economic News of the Week

Rating for MNC’s: NEGATIVE

Housing downturn shows no sign of abating

After last week’s slew of Chinese economic data showed a continued slackening of economic growth and credit creation in July, the NBS released data on housing prices on Monday that similarly showed a broadening and accelerating decline. On a sequential (m-o-m) basis, prices fell in 64 out of the 70 cities tracked by the statistical agency in July, up from 55 in June and 35 in May – and the most since January 2011. Average home prices fell by 0.9 percent m-o-m, up from 0.5 percent in June. Average prices were still up by 2.5 percent over the previous year, but that rate of growth declined from the average 4.2 percent price increase in June. The data compliments the floor space statistics for July, which showed purchases down by -16.3 percent y-o-y in the month (compared to a -0.2 percent drop in June), and growth of overall housing investment easing to 11.9 percent y-o-y in July, down from 12.5 percent in June.

July is typically a slow month for home purchases in China, which may go some way in explaining the accelerated price declines; but the y-o-y numbers for floor space sold indicate that the weakness is more than just a seasonal aberration. Even more worrying, local news reports indicate that a full 37 cities have now actively eased restrictions on housing purchases and yet purchases remain in the doldrums, presumably as buyers continue to hold off for better deals. Efforts by the central bank to ease the cost of funding for mortgages appear to have been undercut by banks, which are unwilling to lend to riskier borrowers, especially at a discount as the PBoC requested recently. And even if mortgage lending rates do begin to ease substantially, the prospect of further price declines will keep some purchasers out of the market. Brisk growth in Wealth Management Products (WMPs) at banks, which grew by 24 percent from end-2013 to June 2014, may also be channeling funds away from the real estate sector – highlighting yet another policy conundrum, as any potential financial liberalization is likely to channel some household investment away from real estate. Moreover, with the broader easing in trust lending – as trust assets fell by 240 billion RMB in June – smaller real estate developers in particular will be forced to slash prices in order to offload inventories, rather than refinance via these high interest loans. And real estate inventories – that are beginning to stretch into the 6-year range in some smaller cities – suggest that the current downturn could take some time to run its course. We continue to expect the popping of localized real estate bubbles in H2 2014 and into 2015, in the most over built provinces. The general sluggishness in the sector will continue to weigh on GDP growth during that timeframe.

The weakness in real estate and the broader economy looks to have affected fiscal revenues considerably in July, with growth in revenue easing to 6.9 percent y-o-y, down from the 8.5 percent pace seen through the first six months of the year. Consistent revenue weakness and a frontloading of fiscal outlays, as a part of the Q2 mini-stimulus, slowed government spending in July as well. Expenditures grew at 9.6 percent y-o-y nation-wide, down from the astronomical 26.1 percent expansion seen in June. While we expect continued use of targeted fiscal support in the second half of 2014, the government’s insistence on a relatively muted fiscal imprint (of about 2 percent deficit in 2014) might restrain the amount of aid that it can give to the economy due to weaker revenue generation. Moreover, the likely maintenance of the current monetary policy stance, as assets continue to deteriorate and inflation begins to pick up in Q4 (on which, more below), means that monetary policy will not do much to pick up the slack. While market observers expect further easing measures to be coming down the pike, we expect limited additional maneuvers, coming primarily in the form of targeted fiscal outlays, highly-focused policy lending and some administrative support via the real estate market. But it won’t add up to enough to really improve growth, and we continue to expect overall GDP growth to ease in H2 from the 7.5 percent since in H1.

Finally, local news reports indicated last week that Liaoning province has seen the worst drought since 1951 this summer. The province accounts for about 5 percent of the country’s total grain output, and it is not the only province to experience such weather-related challenges to agriculture. Henan, Shaanxi and Jilin are also in dire straits. The drought is primarily blamed on the El Niño meteorological pattern – a weather phenomenon that periodically develops in the Pacific Ocean and is associated with abnormally warm ocean temperatures. El Niño appears to have not only effected Chinese crops, but other countries in the region such as Thailand, Indonesia and the Philippines have also suffered. The pull back in crop plantation due to the dry weather will almost certainly work to increase food prices in the fall – with knock on effects in grain-fed meat industries. The potential for such a rise in food inflation in the not-too-distant future means that the PBoC has less scope for policy easing than is commonly assumed. We continue to believe that deteriorating assets in the banking system are the true constraint on the central bank as far as loosening policy, but the potential for upward price movements in food only adds to the pressure to keep monetary and credit growth contained.       

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