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Fear of housing bubble curbs China's growth

17.08.2012

It seems that the Chinese government is now caught in a dilemma: to maintain the economy on a solid growth track while at the same time to prevent the property bubble from ballooning again. China's economy grew by 7.6 percent in the second quarter from a year earlier, the slowest pace since the first quarter of 2009, according to the latest figure from the National Bureau of Statistics (NBS). The country's real estate investment, which accounts for more than one fourth in China's fixed asset investment, saw a growth rate tumble in the first half of 2012, thus dragging down the overall economy. Export, investment and consumption are regarded as the three key drivers for China's economic growth.
According to the NBS, China's property investment grew 16.6 percent in the first six months of this year, compared to 32.9 percent in the same period of last year. The plummet was triggered by the government's tightening measures to cool the sizzling real estate sector, such as restricting the amount of homes a family could purchase, hiking the down payment and mortgage rate for second home buyers.
After those rigorous polices put in place for more than one year, China's property market cooled down in 2011. However, a rebound in both property sales and prices was back in the second quarter this year as more self-use home buyers joined the market. Nationally, house sales in the first half of this year dropped 10 percent year-on-year, compared to the 13.6 percent decline in the first quarter, according to the NBS.

Rebound in housing market after rate cut of the central bank
The rebound was even more obvious last month after the central bank's two interest rate cuts in June and early July, especially in major cities. Of the 70 large and medium-sized cities across China, sale prices rose in 25 cities in June over the previous month. In May, only six saw an increase, according to the NBS report last week. And in June, the national average prices of newly built residential houses rose 0.02 percent on a monthly basis - the first time in the past eight months that the price has seen growth, the NBS said.
The interest rate cuts, industry analysts say, not only reduced property developers and homebuyers lending costs, but also been interpreted by some as a signal the central government may be giving economic growth more of a priority than any further loosening of price controls.
Meanwhile, the interest rate cuts, fine-tuning of real estate policies in some local governments, as well as a boost of sales in the second quarter, have led to a quick switch in public expectations, resulting in some rushed buying, which have pushed up sales and prices. So, should the central government roll out more tightening measures to restrain the rebound in the real estate market? Or it should loosen a bit to stimulate the overall economy from a further sliding. The answer, in fact, largely hinges on China's economic growth trend in the second half year.

Growth in China should pick up in the second half year
Despite the lack-luster performance in the first six months, most economists believes that China's economic growth will be stronger in the second half year. For Lu Zhengwei, chief economist with the Industrial Bank, some signals, including fixed-asset investment and domestic consumption, showed that the economy is being stabilized and should soon be back on a faster growth trend.
"As policies will be continually eased, China's GDP growth may rebound to 7.8 percent in the third quarter, and there is no more need to cut interest rates," Lu said. The HSBC flash China manufacturing purchasing managers index rose to a five-month high in July, driven up by a jump in new export orders. It was the first significant Chinese data in the third quarter and signaled that pro-growth government policies may be gaining traction in the world's second-largest economy. "We view this as positive evidence, supporting our view that the government easing measures to boost investment and demand have started to have an effect," said Chang Jian,economist of Barclays. Summer is usually the low season of the year for industrial activities, but the output index rose above 50 at 51.2 (June: 49.3), the highest in nine months, pointing to a pickup in industrial production growth in the third quarter. "We maintain our view of more but measured monetary easing in the second half year, and see more room in fiscal policy to support growth through tax cuts and more infrastructure investment projects," said Chang.

Controls on property markets should not be relaxed
In a research note released on Wednesday, Standard Chartered said China's macro economy may see a mild recovery in the third quarter as the government's recent stimulus measures, including cutting interest rates, boosting expenditure on infrastructure, began to take effect. "The full-year growth target of 7.5 percent can be achieved and we have no reason to lose confidence," said Sheng Laiyun, the spokesman of the NBS.
In that case, the mainstream outlook from officials and industry experts is that real estate curbs will remain in place over the next half of the year, while the central government will ramp up efforts to encourage developers to build more affordable homes.These moves are expected to prop up real estate investment while satisfying the genuine demand. According to Sheng, the slowdown in China's economy is due to the exacerbation of the external economic environment, the continuation of property control policies and weakening domestic demand. But he also stressed that the strict controls on the property market will not be relaxed.
"Though the curbs on the property market will affect the economy in the short term, they will be conducive in the long run to the wellbeing of the macro economy, especially in preventing a real estate bubble," Sheng added. Some think tanks even urged the government to launch new policies "as soon as possible" to reverse the recent rising price trend, and prevent a "retaliatory rebound". The National Academy of Economic Strategy under the Chinese Academy of Social Sciences, for instance, suggested that the mortgage rate for second-house purchasing should be raised to 1.2 times the benchmark interest rate, and loans should not be provided to third house buying.
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