There were a number of reasons for the iron ore surge last Friday as Chinese liquidity money market liquidity improved and paper markets jumped. But one other policy area also looks like it might be favourable to the all important real estate sector, which absorbs some 30-40% of Chinese steel, depending upon who you ask.
Mid last week President Xi described the outline of property sector reform. Citi has more:
- Top Priority – further accelerate social welfare housing construction. President Xi confirms that it is govt’s responsibility to satisfy housing demand for the low-income group, and ensure the construction target of 36m social welfare housing units under the 12th FYP (2011-2015) is achieved by 2015, to cover 20% of total demand.
- Policy focuses on SUPPLY SIDE, structured by govt-led social welfare housing and private market-led multiple-purpose housing demand. No more mentions of “correcting ASP to reasonable levels” or “curbing investment/ speculative demands”. The govt would try its best to increase housing supply and also learn from the experience of other countries on property market management, as it hopes to build a standardized, mature and stable property supply system.
- More supportive measures to underpin the new “Two Tier Supply System”. The government aims to ensure sufficient land supply, especially for social welfare housing. Moreover, govt also plans to appropriately increase fiscal support for social welfare housing construction. President Xi emphasized the property market’s importance to the economy and society.
- Citi View 1: New Policy Mentality, Two-Tier Supply System – Positive for China Property Sector. This is the first time the govt leaders have shown their stance on property market policy. President Xi’s speech echoes our thesis that the overall policy environment for the sector should stabilize, given that the central govt’s policy mindset has already changed to a more rational view, with long-term focus on regulating the market, rather than repeating the last government’s actions (i.e. curbing demand but at the same time pumping up liquidity). We see a determination in the govt to build up a “two-tier” market (private + social welfare housing. While existing policies like HPR look to continue for a while, more drastic action to curb demand is unlikely. Property tax trials may extend into several new cities, but progress is still uncertain.
- Citi View 2: Positive for developers focused in key cities and non-low end residential. Given the new mindset, we expect government intervention in high-end residential would reduce. Developers with ample land reserves in prime locations of key cities should benefit, as they would be less affected by the new social welfare housing supply. With sufficient land supply, land/property prices should stabilize.
- Solid fundamentals to drive sector’s outperformance. President Xi’s speech should alleviate the sector’s recent policy-related weakness. We believe the sector’s solid fundamentals, with strong growth momentum and balanced profitability/financial position, will continue to drive the sector’s outperformance in 4Q13.
I have often wondered how Chinese authorities planned to rebalance towards greater consumption when the property sector is so central to household wealth yet stopping it from growing is essential to reducing mal-investment. And now I know. They boost construction and let property prices go (within reason) but will likely pull back on infrastructure spend.
Whether that’ll actually amounts to rebalancing is another question. If it does at all it will awfully slow.
