Date
23 May 2017
China's property market continues to grapple with high inventory, prompting many debt-strapped developers to offload housing units at a discount. Photo: Xinhua
China's property market continues to grapple with high inventory, prompting many debt-strapped developers to offload housing units at a discount. Photo: Xinhua

Why market signals are always mixed

China’s housing market has shown an uptick since the government relaxed home purchase restrictions.

The move prevented a crash that could have resulted from efforts to curb high-speed monetary expansion.

Still, the property market continues to grapple with high inventory, prompting many debt-strapped developers to offload housing units at a discount.

That said, the property market is likely headed for a soft landing.

Local government debt is another market concern.

The Ministry of Finance announced a 1 trillion yuan (US$161 billion) debt swap program in March and June and is said to be considering a new round.

The announcement came amid rumors local governments may “window dress” their debt during the mid-year audit which could underestimate the extent of their indebtedness.

If both the housing bubble and local government debt are manageable, what’s spooking market? 

July PMI data fell below market expectations. Non-official PMI hit a two-year low of 47.8 last month.

China’s PMI has hovered around 50 to 51 since 2012, swinging between expansion and contraction.

The government eases monetary policy and adjusts fiscal policy to stimulate economic growth whenever the index falls near 50.

The economic restructuring will not be completed in the next three to five years and is more likely to take a decade.

In recent years, the government has stepped in each time the “old economy” falls and the “new economy” stalls.

But the new economy may not be able to sustain itself unless economic restructuring is successful.

Beijing may unleash a fresh round of stimulus given mixed economic data in recent months.

Growth potential

Investors may have underestimated the growth potential of some sectors.

The US dollar index is up nearly 20 percent from last year and the renminbi has stabilized against the greenback.

As a result, mainland holidaymakers have been flooding into Europe and Japan.

China’s three largest airlines have posted strong earnings thanks to robust outbound travel demand and lower oil prices.

Their stock prices have surged between 40 percent and 120 percent.

However, investors may find it difficult to capture opportunities in this quick cycle.

By contrast, travel agencies and hotels may post more sustainable growth.

Ctrip, China’s largest online travel agent, is up nearly 60 percent from last year.

Also, the strong US dollar is pressing down on commodity prices, benefiting energy and resources consumers.

Coal-fired power plants should manage steady profit growth as a result of lower coal prices.

Natural gas stocks are outperforming due to falling import prices.

Investors should look at the whole picture regardless of short-term price fluctuations.

There is always good news and bad news.

This article appeared in the Hong Kong Economic Journal on Aug. 5.

Translation by Julie Zhu

[Chinese version中文版]

– Contact us at [email protected]

RA

Columnist at the Hong Kong Economic Journal

EJI Weekly Newsletter

Please click here to unsubscribe