Sunday 14 September 2008

Dawn may be approaching for hard-hit developers

The property industry has been the hardest-hit sector during the mainland’s cycle of macroeconomic adjustments
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Guanyu said...

Dawn may be approaching for hard-hit developers

Zhang Ning
13 September 2008

The property industry has been the hardest-hit sector during the mainland’s cycle of macroeconomic adjustments.

With inflationary pressures abating, the balance of risks in the mainland economy is slowly tilting towards a hard landing but it could also mean an approaching dawn for property developers after a very long, dark and stormy night.

The mainland economy has been running near and sometimes over the speed limit for several years, led by property development. Property prices have shot up rapidly, partly because of abundant liquidity in the country and worldwide.

When inflation began to take hold, the central government designed a number of macro policies to slow the economy and specifically, bring the property market back to reality.

The combined effects of an appreciating mainland currency, the US subprime mortgage crisis and a worldwide economic slowdown had taken their biggest toll on the property, export and manufacturing industries.

But while certain measures were introduced to help exporters and manufacturers several months ago, the property sector was left to bear the brunt of the macroeconomic measures. And as long as these measures are in place, there is no hope for the industry to get back on track.

Figures released this week showed consumer inflation had slowed to 4.9 per cent last month while producer price growth rose slightly to 10.1 per cent, although this stemmed mainly from the length of time it took price control measures to reach the market.

The lower inflation rate certainly reflects the impact of tight monetary control. It is obvious that wage pressure and inflation fears are weaker than a year ago.

However, don’t expect inflation to go away, as there are some controlled prices that need to return to market levels, although it is increasingly unlikely that mainland inflation will spiral out of control.

Now that the authorities seem to have contained inflation, it is time to deal with the costs of the economic tightening. Anecdotal evidence shows that more and more companies are going through a very tough time.

The global economic environment is not good. Europe has gone into recession and it is very hard to imagine the United States averting a slowdown, let alone a mild recession. The question is not whether the mainland economy will face an external drag but how severe the slowdown in the country’s exports will be.

Commodity prices are coming down almost as fast as they went up and even though measures have been taken, it is hard to imagine a quick recovery in manufacturing and exports.

To prevent a hard landing, the government initially will have to implement a fiscal rescue and once prices have finally been stabilised, follow it up with an easing of monetary policy.

Such a scenario should see mainland economic growth slow to less than 10 per cent in this half of the year. A stimulus package would be introduced around the year-end when it would be almost impossible not to include the property industry should there be a robust recovery.

The country cannot rely on its exports to drive growth because of the gloomy overseas outlook, while banks are shunning small and medium-sized businesses these days in favour of large state-owned enterprises.

Some banks are willing to lend to promising property development projects but quantity control by the People’s Bank of China means the shutting of nearly all funding to the industry.

Property development risks differ from region to region and across various asset classes. The property bubble mainly affected the Pearl River Delta, the Yangtze River Delta and leading regional centres such as Chongqing and Wuhan.

For the rest of the country, prices have not really come down as volume has hardly slowed.

So, everything depends on whether inflation has been tamed and how much the economy has slowed.

Many property developers have been suffering badly but the more the economy slows, the brighter the light that awaits them at the end of the tunnel.

Economic data, especially GDP growth, lags economic reality most of the time and my sixth sense tells me the mainland economy has been slowing down at quite a rate.

Zhang Ning is a fellow at the Securities Research Institute at Beijing University