Deutsche offer a sober note on China worries today:
A few investors asked whether the PBOC and the government are about to tighten monetary and real estate policy. Their concerns are: 1) the PBOC has stopped reverse repo operations and 7-day repo rate rose 50bps in the past few days; 2) property inflation in four major cities exceeded 20% yoy and the government may be forced take aggressive actions to tighten real estate policies.
We are much less concerned. We believe that macro policies (including monetary and fiscal) will remain largely stable in the foreseeable future (e.g.,
the next six months) and real estate policy will not change on a nation-wide scale. Our rationale is as follows:1) Overall macro conditions are stable and there is no justification for major policy changes. CPI inflation is at about 3% yoy (below the target of 3.5%),
yoy PPI inflation remains negative, GDP growth just began to pick up from the Q2 trough and no policy maker wants to see an immediate reversal of this recovery trend. Broad money supply grows at about 14%yoy, very close to the official target.2) The fact that the PBOC tentative suspended reverse repos is largely due to the net capital inflow since September (September FX purchased by financial institutions amounted to USD20bn, close to historical monthly average) and there is risk of liquidity becoming excessive if the PBOC continues to inject liquidity via reserve repos. The modest increase in 7-day repo rate in the past few days (to 4% today) partly reflects tax payment due dates in October and this pressure should dissipate very soon. Note that the 4% rate remains in the comfort zone of 3.5%-4% for banks.
3) On real estate, the average residential property prices in 70 cities rose 8.7% in September, but it is not sufficient to justify a nation-wide policy change, although some city specific tightening measures cannot be ruled out. The 8.7% property inflation remains lower than urban income growth of 9.5% (yoy for first nine months of this year). On a national basis, income growth has exceeded property inflation by 20ppts cumulatively in the past three years (cumulative income growth of 36% vs. property inflation of 15% from Sept. 2010 to Sept. 2013), suggesting that overall housing affordability has improved. Of course, in four major cities (Beijing, Shanghai, Shenzhen and Guangzhou) where property inflation has reached 20% yoy in September, we do believe that some mini-tightening measures may be needed. These measures could include a further tightening of eligibility requirement for second home purchases, longer waiting time for processing mortgage applications for second home buyers, and policies to increase supply such as those announced in Beijing today. These measures may help slow property inflation in a few large cities but should not have a material impact on the overall economy.
I agree on the first point that the PBOC has many reasons for altering its liquidity operations so ascribing that to a sudden tightening bias aimed at property is alarmist. However, I don’t agree with the rest of the note. Chinese property markets are running strongly and the time to act is now not later. The note is right that measures, if they come, will be fiscal not monetary but they will also have the potential to slow the economy, as they have done in the past, especially since the pulse of infrastructure investment is already past its peak as well. Still, they may not come at all, but if so, it’ll be a break with tradition.
