15 November 2018
China needs to be vigilant about deflation risks, central bank governor Zhou Xiaochuan has warned. Photo: Bloomberg
China needs to be vigilant about deflation risks, central bank governor Zhou Xiaochuan has warned. Photo: Bloomberg

China property plays to benefit from policy easing

The Shanghai Composite Index gained 2 percent last week after a 7 percent rise the previous week.

The rally came as the Boao Forum, which opened on March 28, reignited market hype for the “One Belt One Road” plays. Construction materials stocks were the biggest beneficiaries, as they jumped over 8 percent in the last week alone.

On March 27, the Ministry of Land & Resources and the Ministry of Housing and Urban-Rural Development released a joint circular that outlined plans to slash land supply for housing in regions that have an oversupply of home units.

The circular also stated that undeveloped sites that had earlier been earmarked for housing will be allowed land-use change, so that the plots can be used for other purposes. And some housing projects under construction will be switched to public rental housing and rebuilding of shanty towns.

The new policy is aimed at reducing supply for private housing market and mitigating the market oversupply.

The People’s Bank of China has launched various easing measures since November last year, but they provided very limited boost for the mainland property sector.

This time, the government has targeted the key issue of excessive supply, a move that will benefit property developers in the long term. 

Apart from land supply, the central bank is also considering a reduction in the down-payment ratio for purchases of second homes, according to some Chinese media reports.

Currently, second-home buyers are required to pay 60 percent down-payment, and the mortgage loan rate is 110 percent of the benchmark interest rate.

Market rumors have it that many banks intend to relax the down-payment ratio to 50 percent, which may give another boost to the housing market.

Also, the monetary policy is poised to stay loose in the coming months. Central bank governor Zhou Xiaochuan, during the Boao Forum, has warned about the mounting risk of deflation.

Inflation has crept up by only 0.8 percent and 1.4 percent respectively in January and February this year due to falling oil prices and monetary easing measures worldwide.

As the monetary policy also needs to adapt to the “new normal” of the economy, authorities will expand their policy tools from quantitative easing and move into a set of pricing instruments and other measures, according to Zhou.

Thus, we can conclude that Beijing is set to adopt loose monetary policy as well as launch more supportive measures.

Given all these factors, the property market is likely to hold up well. Reduced land supply and easier mortgage loan rules will particularly benefit the large property developers.

As for mainland banking plays, the prospects don’t look too good in the near term despite the monetary easing measures.

Following some disappointing earnings announcements last week, the financial sector has dropped nearly 2 percent on the stock market within the last week.

Moderating profit growth and rising bad loans of big banks could result in the sector remaining under pressure in the short term.

This article appeared in the Hong Kong Economic Journal on March 30.

Translation by Julie Zhu

[Chinese version 中文版]

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a columnist at the Hong Kong Economic Journal

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