China’s frothy property market falters in June

Reuters | Monday, 12 July 2010 | 12:02 GMT

China's property boom China’s frothy property market may have peaked after a government clampdown on speculators, new data has shown. Property prices across 70 cities fell 0.1% in June compared with May – the first monthly fall since February 2009. Meanwhile, separate trade figures released at the weekend showed exports surging, but imports lagging. The data paints a mixed picture for the Chinese economy, which some economists and investors fear may suffer a sharp slowdown later in the year.

Turning point

In April, the Chinese government introduced a series of new regulatory restrictions on the housing market that sought to restrict speculative buying. These included higher down-payments on house purchases, stricter lending rules for property developers, and limits on the ability of investors to buy more than one home. Many economists, investors and policymakers – both inside and outside China – worry that Chinese real estate may be experiencing a bubble brought on by excessively low interest rates, which has fuelled speculators. Despite the monthly fall in June, property prices across China still remained 11.4% higher than a year ago. Financial markets are now assessing whether Beijing will successfully pull off a soft landing in housing prices, or whether the Chinese property market will now deflate in the same way the US market has done since 2007.

Brakes on

The property market restrictions are just one dimension of a general move by Beijing to unwind a package of stimulus measures that helped China weather the global recession, in the face of accelerating inflation. Data released on Monday by the Chinese central bank showed a continued slowdown in bank lending throughout the economy. Net new lending – which is tightly regulated in China – fell to 603bn yuan ($89bn; £59bn) in June, down 5.6% from May, and down more than half compared with a year ago. The Chinese government encouraged an 

unprecedented expansion in bank lending last year in response to the recession. Much of that lending went into infrastructure investment. But some of it also went into property speculation. Interest rates have also been kept at an artificially low rate, which some economists argue provides a hefty subsidy from Chinese households, who have large savings, to Chinese industry and local governments, who are major borrowers. This tends to weaken consumer spending by households, and overstimulate investment.

DOLLAR Vs RENMINBILagging imports

Meanwhile, Asian stock markets reacted well to the trade figures, which pointed to stronger recovery in global demand. Exports jumped 43.9% compared with a year earlier – well ahead of market expectations of a 38% rise. Imports however only rose 34.1%, in a sign that Chinese consumer spending continues to lag the booming economy. The trade data is very timely for China from a political perspective. The surge in exports means that China’s controversial trade surplus grew even more rapidly in June.

‘Currency manipulator’

It comes less than a week after US Treasury Secretary Timothy Geithner published a much delayed report on China’s currency policy. That report notably did not label Beijing a "currency manipulator", undermining efforts in the US Congress to pass punitive trade sanctions against China. China pegs its currency, the yuan, to the dollar at an exchange rate that many in the US argue gives Chinese exporters an unfair price advantage. The US Treasury’s decision to take the political heat off China was a response to a more flexible exchange rate policy announced by the Chinese central bank in June. However, so far this "flexibility" has translated into a mere 0.9% rise in the value of the yuan.

Slowing reserves

One indication of China’s alleged manipulation of its currency is its accumulation of US dollar reserves. In order to keep the yuan cheap, the Chinese central bank must hoover up all the unwanted dollars accumulated by its exporters. Yet according to data released on Monday, the pace of reserve accumulation has slowed significantly. The central bank said it collected only $7.2bn of reserves in the second quarter of the year, down from $47.9bn in the first quarter and a quarterly average of $113bn last year. This may be an indication that since the new "flexible" yuan policy began, markets have had a bigger role in deciding the exchange rate. However, much of China’s reserve accumulation does not appear in the official data, making it difficult to draw an immediate conclusion.


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