Bloomberg News

China Property-Sales Drop Shows Risk of Hard Landing

April 13, 2012

China’s 18 percent first-quarter drop in home sales contributed to the slowest economic expansion in almost three years, highlighting the challenge for leaders who want to curb property prices without sinking growth.

The value of homes sold declined to 709.9 billion yuan ($112.7 billion) from a year earlier, the National Bureau of Statistics said in Beijing yesterday. Gross domestic product in the world’s second-biggest economy expanded a below-forecast 8.1 percent from a year earlier, decelerating for a fifth quarter.

Premier Wen Jiabao yesterday reiterated the government will maintain property curbs while ensuring the economy has enough investment to support growth. The stance on real estate risks a so-called hard landing unless authorities start to reverse their position, said Fred Hu, a former chairman of Greater China for Goldman Sachs Group Inc.

“For now the government says it wants to maintain a hard line,” said Hu, chairman of Primavera Capital, a Beijing-based private-equity firm he founded. “Sooner or later they will have to bow to the reality if they don’t want to have a prolonged economic slowdown.”

The benchmark Shanghai Composite Index (SHCOMP) rose 0.4 percent to close at a three-week high. Analysts at Bank of America Corp., Nomura Holdings Inc. and IHS Global Insight said the first quarter may mark a trough, partly on speculation the government will loosen credit by lowering banks’ required reserves.

Reserve-Ratio Cuts

Societe Generale SA’s Yao Wei said growth may decelerate to 7.8 percent in the second quarter on tightening in the property market and a further slowdown in housing investment. Standard Chartered Plc economists gave the same forecast for GDP growth this quarter and projected four more reserve-ratio cuts of 50 basis points each this year. That would bring the ratio to 18.5 percent for the largest banks.

“Faced with a continued weakening of domestic demand, Beijing will have to step up easing measures,” the Standard Chartered analysts said in a note yesterday.

China’s State Council, or Cabinet, pledged to stick with existing property controls and prepare policy tools to cope with economic challenges, according to a government statement yesterday that summarized a meeting chaired by Wen.

The fundamentals of the economy remain sound with growth “within a reasonable range” even as the domestic expansion faces “downward pressures,” the government said, pledging to “maintain an appropriate level of investment.” Macroeconomic policies have “relatively large room to maneuver,” according to the statement, which didn’t repeat a pledge to maintain “prudent” monetary policy and “proactive” fiscal policy.

More Loosening

The statement “appears to be a clear signal that more credit loosening will follow,” Mark Williams, London-based chief Asia economist at Capital Economics Ltd., said in a research note yesterday.

Other data this week showed an economic pickup toward the end of the quarter. New yuan lending was the highest in a year and money-supply growth quickened in March, while industrial production and retail-sales gains accelerated.

The property-market tightening “prevented the government from adopting more measures to support domestic demand earlier,” said Helen Qiao, chief Greater China economist at Morgan Stanley in Hong Kong. At the same time, the government is relaxing some measures “by stealth,” with support for first- time home buyers and expedited construction of low-cost housing projects, she said.

Discounted Loans

Banks in the cities of Beijing, Shanghai and Guangzhou are offering as much as a 15 percent discount off the benchmark interest rate on loans to first-home buyers, China Securities Journal reported April 12, citing property agents it didn’t identify. The central bank said last month it will ensure “loan demand from first-home families” is met.

Chinese developers including Fosun International Ltd. and Sino-Ocean Land Holdings Ltd. are setting up property funds to diversify their sources of revenue as real-estate curbs have led to a cash shortage, company executives said last month.

Investments in homes, office buildings, malls and other real estate gained 24 percent to 1.09 trillion yuan from January to March, according to the statistics bureau, slower than the 35 percent gain in the year-earlier period. New property construction increased 0.3 percent to 399.5 million square meters (4.3 billion square feet).

Sheng Laiyun, spokesman for the statistics bureau, said at a press conference yesterday that “controlling property bubbles will certainly affect relevant investments or even housing- related consumption.”

“But from a medium- to long-term perspective, the property curbs don’t conflict with the goal of economic growth,” as the curbs are meant to “maintain steady and healthy development” of the housing market and sustainable growth, Sheng said.

Housing Difficulties

China’s private housing market may see its “most difficult period” in the first half with “some stabilization” after that, JPMorgan Chase & Co. economists led by Zhu Haibin in Hong Kong said in a research note yesterday.

The bank cut its forecast for China’s economy to an 8.2 percent expansion in 2012 from 8.4 percent, citing the first quarter’s “weaker-than-expected” performance.

“The property sector is where most concerns lie,” Williams said in the note. “The biggest near-term threat to growth is that construction activity does stall.”

--Kevin Hamlin, Victoria Ruan. With assistance from Bonnie Cao in Shanghai. Editors: Scott Lanman, Nerys Avery

To contact Bloomberg News staff for this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net; Victoria Ruan in Beijing at vruan1@bloomberg.net.

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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