From Investing in Chinese Stocks.
Three articles on Zhejiang markets today. One is about a new policy that will seek to massage the housing data, presumably in an attempt to shift market sentiment. The second shows the damage a real estate bust will cause. The last shows the two diametrically opposed opinions in China’s housing market. On the one side are the teetering developers and real estate agents in Hangzhou who fear for their business and see the government being in the same dire straits; a bailout must be coming. On the other side are those who see the central government opposed to policy easing. Additionally, Hangzhou serves as a bellwether for the national real estate market and the government does not want to reinflate the bubble, so no rescue is coming beyond some “fine-tuning.”
The first article (消息称杭州楼盘降价超15%限制网签：防范楼市大跌): The Hangzhou government will hide the cooling trend in the real estate market. Any price decline more than 15% below the list price will not be entered into the online registry. Developers are not forbidden from cutting prices and no sales will be stopped, though at least one developer expressed concern that advance sales permits may not be issued if the price cuts are deemed too large. The second article below likens this policy to the stock market daily price limits.
The second article (楼市低迷引发经济连锁反应 地方官员称迟早要救市): A local bank official in Zhejiang says the real estate depression leads to a chain reaction and sooner or later the government will intervene. Every industry is feeling the effect and not just those who sell directly to developers, such as steel, glass and cement producers. Many companies borrowed money to fund real estate development as well. A Shenyin Wanguo analyst estimates that if real estate investment growth falls to 14% this year and there is no government intervention, GDP growth will slow to 6.6%, almost a full point below government targets.
Real estate investment slowed to 16.7% yoy growth in the first four months of 2014, down 4.7 percentage points from 2013, and more than the 3.4 percentage point decline in growth for all of 2013: the slowdown is accelerating. Real estate sales fell 6.9% yoy in the first four months of the year, land purchases fell 7.9% and new area under construction fell by 22.1%.
Cement growth is only 4.3% yoy through April and prices have fallen for 4 consecutive weeks. One firm, Sunan Cement, expects to shut production for 10 days each month starting in June and July for fear that there will be weak demand.
Steel prices have also fallen for four consecutive weeks; glass demand turned negative in March; electricity demand is slowing.
From this article and others like it’s clear that many industries expect government intervention. Home buyers are cautious. Nearly everyone is watching and waiting to see what the action the central government takes. If the government intervenes, the slowdown may bottom out or the bubbles may reinflate. If the government does not intervene (or doesn’t do enough), the market will tumble as those waiting decide to take action. Right now is the calm before the storm.
A real estate agent said that even if sales pick up, price cuts will kill the firm. He said the government is more nervous than the industry because if land sales stop, they might not even be able to pay the wages of government workers. He expects, and hopes, the government will do something to rescue the market.
Dr. Ye Hongwei, Assistant Director of the Real Estate Investment Research Center, Zhejiang University, said the national government would not ease policy. He said there are really only two areas that might ease: buying restrictions and credit limits. The credit limits are set at the central government level and are unlikely to ease. The buying restrictions are set locally, but so far only small cities have enacted these policies. Wenzhou has seen prices fall for 30 straight months and there has been no real easing (aside from a small change last August). He said easing in Hangzhou is unlikely: it is a sensitive real estate market and a bellwether for the national real estate market.
The ultimate cause of the problem was excessive credit growth. The subsequent steps were all aimed at dealing with that policy mistake. Similarly, after 2008 the government encouraged people to buy cars to boost economic growth, then in 2012 everyone is complaining about congestion and rising pollution levels in Beijing. Now this is the headline: China to scrap millions of cars in anti-pollution push. The bill for 5 years of malinvestment is coming due.
