China has set five targets for 2016 — resolving industrial oversupply, destocking (in the property market), deleveraging (to avoid financial risk), reducing capital cost and expanding effective supply.
The oversupply issue has been kicking around for years but destocking is a new buzzword this year.
Tsinghua University professor Li Daokui said destocking could lead to a new wave of property development frenzy in top-tier and second-tier cities.
Also, that could prompt more rural residents to move to cities, resulting in economic growth and higher home prices.
Will Li’s prediction come to pass?
This year, the market was abuzz with speculation about the potential inclusion of China’s A shares in the MSCI index after domestic stocks soared in April.
In the second half, amid a worsening economic slowdown, China kept the renminbi exchange rate on the strong side of the daily guidance rate, prompting talk that it was a deliberate move to successfully shepherd the currency to the International Monetary Fund’s special drawing rights (SDR) basket.
At present, home prices in the mainland remain high and the idea of destocking is beginning to look like an attempt to induce people to buy property at peak levels.
One of the reasons behind a slew of friendly measures for the real estate market is that mainland developers have a higher gearing ratio than the national average.
This is not a problem when home prices are rising.
Would the government allow a major developer to collapse if home prices fall?
Instead of waiting for the situation to worsen, would it make more sense to encourage private money to enter the market now?
Another question is whether we are going to see a surprise run-up in residential prices.
After the government stops printing money — M2, a broad measure of money supply, is low — would we see a one-sided home price growth rate?
And when salary increases are disappointing, could home prices continue growing?
In recent years, every time the Hang Seng China Enterprises Index has fallen to about 9,000, it has staged a strong rebound.
The index could dramatically rise in the next two to three months after interest rates and banks’ reserve requirement ratio were cut several times this year.
Before that, however, deflation could drag on the stock market.
Destocking will help defuse systemic risk but if home prices fall, mainland banks will suffer.
When the market’s two most heavily weighted sectors are weak, how will the overall market index perform?
Of course, individual stock performance may not have a direct correlation to market ups and downs.
New energy and technology stocks will continue to be winners but who knows what the overall market will be like?
This article appeared in the Hong Kong Economic Journal on Dec. 23.
Translation by Myssie You
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