Last week, the week following the PBOC’s rate cut, primary home transaction volume increased by 6% week-over-week for both units and sqm sold nationwide. That compares to 100% and 105% week-on-week increases, respectively, during the week immediately after the announcement of the mortgage lending relaxation on September 30. Secondary home transactions changed by -1.4% and 2.2% in units and sqm sold nationwide, compared to 238% and 244% respective increases during the week following the September mortgage policy change. (See charts below)
So far, home market data suggests that the rate cut has a much tamer impact on the housing market than the 9.30 policy.
However, during the same week the offshore market surged by ~4%, led by the insurance (+14%) and property (+12%) sectors. The onshore market surged by 8.7% led by real estate (17%) and financials (17%).
We believe the stock market’s recent performance reflects an unwarranted optimism based on a false assumption that the latest PBOC benchmark cut and the future rate cuts (including RRR cuts and other expansionary open market and repo actions) will reverse the deterioration of the residential housing sector, the lynchpin of China’s economy. The policy stimulus will likely mitigate and delay the decline in home prices and transactions, and may even bump up the construction related activities in the near term. However, it will not reverse the weakening of the property market, both secondary and primary. As we have written previously, that weakening is caused by a mismatch between supply (largely of luxury homes) and demand (for social affordable homes), an aging society that leads to fewer first-time buyers, and excessive leverage in the Chinese corporate sector. The excess supply in the housing market must be worked off gradually, and that will require a bigger correction in home prices than seen in 2014.
The authorities can and will do more to stimulate the economy, both through further interest rate cuts, reserve requirement ratio cuts and other credit-enhancing measures. The central government may even provide a fiscal stimulus in 2015. If, however, the fiscal stimulus aims to make SOEs (which are already burdened with excess capacity) and local governments use banking sector credit and local government bond issuances to take on more projects with doubtful commercial viability, it will do little other than feed the credit bubble and increase excess capacity.
Only if the fiscal stimulus directly targets consumers and social/affordable housing, and is funded directly or indirectly by the central government, can the slowdown in the economy perhaps be halted. The sharp decline in oil prices (down 40% since June) will provide a boost to consumers in China and to producers that use oil as an input.
A comparison of rate cuts in 2014, 2012 and 2008
We have compared the expansionary monetary policies in 2014, 2012 and 2009, including the benchmark rate cuts, RRR cuts, and other market operations that the central bank attempted in 2008 and in 2012. Together with 4 trillion RMB spending and 10 trillion RMB of bank lending, these measures helped stave off two recessions but also fed a credit bubble and rampant corruption. In 2008, the authorities also eliminated all constraints on lending and credit to promote a big fiscal spending boost, to a large extent through local authorities. In 2012, likewise, authorities introduced fiscal stimulus on top of the rate cut.
Source: Markets
