Market Economics | Interest Rate Strategy - BNP PARIBAS ...

But property prices have barely corrected…
The property price index increased 11.4% y/y in June,
compared to 12.4% in May, 12.8% in April and
11.7% in March. The index actually dropped 0.1%
m/m in June, the first m/m decline recorded for 17
months. The housing price index was up 14.1% y/y in
June, but was flat in m/m terms (Chart 3).
…because property developers are not short of
funding
Property investment capital supply rose 45.6% y/y in
H1. Capital supply is equivalent to 178% of property
investment. Capital borrowed from banks increased
by 34.5% y/y (compared to overall lending growth of
19.2%), property developers’ self-raised funds
surged by 50.9%, and other funds were up by 47.9%.
Property developers are thus not under pressure to
cut house selling prices for cash flow purposes
despite housing inventory rising, even stepping up
the pace of investment and construction (Charts 4
and 5).
Controlling house prices has become a political
game between the central government and property
developers. Local governments are waiting for the
central government to change policy. In our view,
house price controls will not be changed for the time
being. If the government relaxes current policy in any
way, house prices could start to rise again and the
authorities would lose credibility.
In fact, if the government relaxes controls at this
stage, the property industry could in the longer term
suffer even more than it would if policy is left
unchanged. It is a critical time for both the
government and property developers. As long as
house prices fall by 10-15%, social expectation will
be satisfied, the government will relax the controls
and the property industry will be able to return to
normal growth. If the government continues with its
existing policies, the correction in house prices will
gather momentum and the policy objective could be
achieved in Q4 this year.
In terms of policy, we expect the government to strike
a better balance between propping up growth and
economic restructuring at the upcoming summer
meeting; we do not expect a general easing. Rather,
we expect selective easing: a delay or scaling down
of the measures to rectify local government financing
vehicles; the easing of policies designed to tackle
excessive capacity and pollution; and the alleviation
of measures to tighten corporate liquidity.
Chart 2: Property Transactions have Declined
Substantially (% YTD)
90
80
70
60
Property sales value
50
40
30
20
10
0
Property sales volume
-10
-20
-30
00 01 02 03 04 05 06 07 08 09 10
Source: NBS, BNP Paribas
Chart 3: House Price Correction has Only Just
Started
114
112
110
108
106
104
102
100
(Dec 08 = 100)
Property price index
98
Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10
Source: NBS, BNP Paribas
Chart 4: Housing Inventory is Rising (% YTD)
70
60
50
40
30
20
10
0
-10
Floor space completed
Property sales volume
-20
00 01 02 03 04 05 06 07 08 09 10
Source: NBS, BNP Paribas
80
70
60
50
40
30
20
Chart 5: Newly Started Property Space May
have Peaked (% YTD)
Floor space started
Property sales volume
10
0
-10
-20
00 01 02 03 04 05 06 07 08 09 10
Source: NBS, BNP Paribas
Xingdong Chen 16 July 2010
Market Mover
15
www.GlobalMarkets.bnpparibas.com