Fears rise that cooling has gone too far

Hangzhou becomes the first city that puts floor under prices of new homes

For several years the central government has gone all out to curb home price increases, but one city has now introduced measures to stop prices from falling too much.

Under rules adopted by the municipal government of Hangzhou, Zhejiang province, any new-home sales transaction in which the price is 15 percent or more lower than the price preregistered with the government will be declared void.

Hangzhou is believed to be the first Chinese city to set up a floor for sales prices for new homes. New-home sales prices in the city fell 0.7 percentage point in April compared with the previous month, the National Bureau of Statistics says.

The property market accounts for 16 percent of the country's GDP and 25 percent of fixed-asset investment, and a slowdown, particularly given the spillover effects on 60 industries, would be likely to have huge ramifications for the broader economy.

"Considering the importance of the property sector to China's economy, we think the government will introduce more loosening measures to mitigate the impact of a housing market slowdown," says Stephen Green, economist with Standard Chartered.

Several city governments have announced local loosening measures, including relaxed buying restrictions, lower deposits and easier access to mortgages.

"We expect more lower-tier cities to follow suit, which will help prevent local markets from collapsing," Green says.

The central bank, the People's Bank of China, has also told banks to speed up mortgage lending, set mortgage rates at reasonable levels, and do more to meet first-home buyers' mortgage requirements.

"A change in real estate policy is usually used as a shot of adrenalin for the overall economy, but will that always work?" asks Mao Daqing, vice-president of Vanke, the country's largest property developer in terms of market value.

Since the beginning of the year, real estate sales have slumped and prices have fallen.

Among 70 major cities, month-on-month prices fell in eight of them in April, double the number for March, the National Bureau of Statistics says.

"We expect this downshift of momentum in the residential property markets to persist, along with a macroeconomic slowdown this year," says James Shepherd, head of research for greater China at Cushman & Wakefield Ltd.

China's economic growth fell to 7.4 percent in the first quarter, and showed no signs of recovery in April as many had expected, raising the risk that the country could miss its economic growth target of - 7.5 percent this year - for the first time in 15 years.

Almost all the leading economic indicators, such as industrial output, fixed-asset investment and retail sales, showed signs of weakening in April.

Most economists regard a persistent, sharp downturn in property as the biggest risk for the economy over the next couple of years.

"The correction in the property market is a key to watch for growth and policy response," says Chang Jian, an economist with Barclays.

"Tightening monetary conditions combined with overbuilding and increased developer leverage last year have exacerbated the supply-demand situation in housing. And the current downturn is likely to continue into 2015."

Self-fulfilling expectations of falling house prices and developers' rising financial difficulties, on the back of a highly leveraged economy with huge local government debt and a fragile financial system with a large shadow banking sector - suggest the risks of a disorderly adjustment are rising, Chang says.

Wang Haifeng, a researcher with the Institute for International Economic Research at the National Development and Reform Commission, says: "The property sector poses the biggest risk to China's economy over the coming years. The earlier the correction, the better. A slowdown of the economy is the cost we have to pay."

Many foreign investment banks have reduced their China GDP forecast, given the weaker-than-expected real estate sector.

UBS lowered its GDP growth forecasts for this year from 7.5 percent to 7.3 percent and for next year from 7 percent to 6.8 percent

"Our sensitivity analysis suggests that a 10 percentage point drop in the growth of construction volume would result in a 2.5 percentage point drop in GDP growth, including second-round effects," Wang says.

In the absence of policy stimuli, Nomura Securities Co Ltd says, falling real estate investment could drag GDP growth down to 6.7 percent this year and 5.8 percent next year.

"Our baseline remains that the government will have to loosen fiscal, monetary and property sector policies significantly to achieve our forecast for 7.4 percent GDP growth this year," says Zhang Zhiwei, an economist with Nomura Securities.

On May 22, when Premier Li Keqiang visited Chifeng, Inner Mongolia, he said the Chinese economy is stable in general, but that it faces risks and the government should take them seriously.

"We believe this statement is stronger than his statements from previous speeches and indicates policy easing may pick up speed," Zhang says.

"It reinforces our view that fiscal and monetary policies will be loosened in the second quarter to stabilize growth and counter the macro risks from the property market."

China's property downturn will also affect the rest of the world. Commodities exporters and some regional economies with large exposure to China's domestic demand would be most affected by a property downturn in China. Commodity prices and currencies would probably react negatively as well, according to research by UBS.

(China Daily Africa Weekly 05/30/2014 page15)