China may move to revive property market

Source : Business Times - 7 Oct 2008

Specific measures and rate cuts may be used to prevent sharp slowdown, says JPMorgan

China may use targeted measures and interest-rate cuts to revive a sagging property market and sustain economic growth, said Jing Ulrich, chairwoman of China equities at JPMorgan Chase & Co in Hong Kong.

‘Expectations are building for the government to introduce policies supporting lower-income home buyers and a selective easing of credit for some developers,’ Ms Ulrich said in a note yesterday.

Policymakers are trying to prevent a sharper slowdown in the world’s fourth-biggest economy as the credit crisis undermines demand in export markets. China can’t afford a housing-market slump because the property sector accounts for a quarter of fixed-asset investment and 10 per cent of employment, Ms Ulrich said.

House prices in China’s 70 major cities fell 0.1 per cent in August from July. Morgan Stanley analysts warned last month that the sector could be heading for a ‘meltdown’.

‘As the property market’s woes spill over into other areas of the economy, we expect the government to selectively loosen restrictions on the sector,’ Ms Ulrich said. ‘Specific measures to boost the property sector may be necessary to forestall a sharper slowdown in the broad economy.’

The steel industry relies on construction work. Steel company shares tumbled yesterday after the China Securities Journal reported that some steelmakers will cut output by 20 per cent this month as demand cools.

Baoshan Iron & Steel Co Ltd fell 8.8 per cent and Angang Steel Co declined 10 per cent. The broad market gauge, the CSI 300 Index, closed down 5.1 per cent.

‘It looks like the Chinese construction sector has some fairly serious issues,’ Richard Jerram, chief economist at Macquarie Securities Inc in Tokyo, said in a Sept 30 interview. ‘They had a bubble and the bubble burst; it’s a familiar story.’

Property demand in Chinese cities has dropped by as much as half since the government last year raised minimum downpayment requirements and increased rates on some mortgages to cool home prices, according to CSC Securities HK Ltd analyst Liu Bin.

Oriental Daily reported on Sept 10 that developers China Vanke Co, Hengda Real Estate Group, and Shimao Property Holdings Ltd were cutting apartment prices by 15 per cent to 35 percent.

According to Ms Ulrich, possible measures to support the property sector include: lower interest rates and bank reserve requirements; reduced downpayment requirements; and allowing more bond sales to finance property developers.

The government could also reduce or eliminate land appreciation tax and let home buyers deduct mortgage payments against personal income tax.

Local governments have already stepped in to aid some property markets, Ms Ulrich said, citing the examples of reduced downpayment requirements in Sichuan and loosened loan limits for developers in Shenzhen.

China cut borrowing costs last month for the first time in six years.

‘Policies will likely be geared up to stimulate the economy while minimising those financial and economic impacts of an imminent real estate bust,’ said Lu Ting, an economist with Merrill Lynch & Co in Hong Kong.

China’s economy expanded 10.1 per cent in the second quarter, the fourth straight quarter that growth has slowed. This year’s expansion may be 9.6 per cent, down from last year’s 11.9 per cent, UBS said yesterday.

Weakness in the property sector may shave half a percentage point off China’s economic growth next year, Ben Simpfendorfer, an economist with Royal Bank of Scotland plc in Hong Kong, said in a Sept 26 report.

Still, the migration of rural people to the cities requires the annual construction of enough apartments to house the populations of London and New York combined, meaning there’s strong underlying support, he said.