Thursday 23 October 2008

China’s Home-Sales Stimulus May Fail to Protect Economic Growth

China’s measures to encourage home sales aren’t enough to stop a cooling property market from dragging down growth in the world’s fourth-largest economy, said Credit Suisse AG and Standard Chartered Bank Plc.

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China’s Home-Sales Stimulus May Fail to Protect Economic Growth

By Li Yanping

Oct. 23 (Bloomberg) -- China’s measures to encourage home sales aren’t enough to stop a cooling property market from dragging down growth in the world’s fourth-largest economy, said Credit Suisse AG and Standard Chartered Bank Plc.

The government yesterday trimmed costs, including mortgage rates, taxes and down-payments, for first-home buyers.

“This is the biggest property rescue package in China’s history, but it didn’t touch the two most critical areas that are dragging down the property market -- property developers’ stressed cash flows and consumers’ expectations for further price drops,” said Tao Dong, chief Asia economist at Credit Suisse in Hong Kong. “The measures won’t do the job.”

China’s economic expansion cooled to 9 percent in the third quarter, the slowest pace in five years, as the global financial crisis cut demand for exports. A slump in property, hurting investment and consumption, is the next big risk, said Tao.

China is the biggest contributor to global growth and property investment accounts for a tenth of the nation’s gross domestic product, economists say.

“Yesterday’s measures, which mainly address first-home buyers, will only save a tiny amount of money for buyers, and as long as expectations remain that prices will fall, the wait-and- see sentiment will prevail,” said Li Wei, an economist at Standard Chartered in Shanghai.

Shenzhen Prices Tumble

China’s official property statistics have failed to capture the scale of declines in prices in many cities this year, according to Li.

House prices rose 3.5 percent in September from a year earlier, the slowest pace in at least three years, the government said yesterday. Prices for new homes in the southern city of Shenzhen tumbled 10.8 percent, the biggest decline nationwide.

Home sales by volume plunged 55.5 percent and 38.5 percent in Beijing and Shanghai in the first eight months from a year earlier, according to state media.

Prices may fall by at least 10 percent in the next six to 12 months, according to Credit Suisse’ Tao. Xing Ziqiang, an economist at China International Capital Corp. in Beijing, predicted a 10 percent to 20 percent drop over one or two years.

Shares of China Vanke Co. and Poly Real Estate Group Co., the nation’s two largest publicly traded developers by market value, jumped 2 percent and 1.9 percent as of 1:38 p.m. in Shanghai. That compared with a 1.2 percent decline for the CSI 300 Index of stocks.

Vanke’s Price Cuts

Vanke said last month that it had cut prices for new residential units by an average of 10 percent since October 2007 to revive slumping sales.

“Prices are still too high for people to afford,” said Liu Bing, a real estate analyst at CSC Securities HK Ltd. “The change may help improve sentiment in the short term but is unlikely to lift the property market.”

Homes prices in Beijing, Shanghai, Shenzhen and the seven other biggest Chinese cities are 40 percent more than average households can afford, according to China International Capital.

China unveiled measures on Oct. 19 to stimulate the economy in the face of the global slowdown, including infrastructure spending and increased export-tax rebates. The State Council has also approved changes to the value-added tax system that could save businesses between 150 billion ($21.9 billion) and 200 billion yuan, the Information Times reported today, without citing anyone.

The property measures are a “sensible and smart” move to encourage investment, David Dollar, the World Bank’s China country director, said in Beijing today.

To sustain consumption, investment and economic growth, the government also needs to cut smaller businesses’ taxes and increase spending on social welfare, he added

Economic growth has slipped from last year’s 11.9 percent.

“The days of 12 percent growth are gone and may have gone permanently,” Dollar said.