A very flat market

I want a discount...

Only a few weeks ago, the main worry among Chinese policymakers was the risk of a property bubble. These days, the talk around the water-coolers is that the government’s latest measures to rein in soaring home prices might have been too heavy-handed.

In April, Beijing imposed new curbs on housing speculation, raising down payment requirements and mortgage rates. Buyers must make at least a 50% down payment on a second home, even if it is their first mortgage. In some property hotspots, out-of-towners cannot get a mortgage until they have paid local taxes for at least a year.

The measures seem to be working – probably far more effectively than the government had hoped. Prices of new homes fell by over 20% on average in the first week of May in Beijing, Shanghai and Shenzhen. It’s a big turnaround from April, when property prices rose a record 12.8% from a year earlier, according to the National Bureau of Statistics.

Transaction volume has also slowed to a crawl. The Shanghai Securities News reported a 70% drop in new homes transactions in Shanghai in May. Beijing and Shenzhen have also seen sales drop by as much as 80% in the same month.

As a result, property developers are feeling the pain. Guangzhou-based Evergrande Real Estate fired the first salvo in the latest discount war by slashing prices of 40 projects in 20 cities by 15%. Vanke, the country’s biggest property developer by market capitalisation, is said to be following suit by cutting prices up to 30% in the next three months, says Beijing News. Property developer Longfor announced last week that its contract sales have dropped by 40% since April as buying interest dampened.

Other businesses like furniture and home appliances have also witnessed a significant drop in orders. Curtain maker Pan Wei, for example, has seen his pile of order slips thin as property sales slow.

Pan told the South China Morning Post last week that his sales are the worst he’s seen since he set up his business in Shenzhen a year ago – just as the property market was beginning to recover from the global financial crisis.

And it seems like things are about to get worse for Pan and the property developers. The State Council, China’s cabinet, has approved a plan to “gradually push forward reform” of the country’s property tax regime.

The news comes soon after the Shanghai government announced that it had submitted its own property tax proposal to the central government for review, says the China Securities Journal. The city may impose the tax on people without residence permits and those who have not filed income tax declarations for three years or more.

The news caused the stock market to take a dive. The property sub-index of the Shanghai Composite dropped 2.8% in response. It has slipped almost 30% since the start of the year and 47% from its July 2009 peak.

The bond market is not faring any better. Bloomberg reported recently that dollar bonds sold by Chinese real estate companies this year are the worst performers in the Asian corporate debt universe.

Yields on the $3.9 billion of bonds issued by Kaisa Group, Country Garden Holdings and seven other developers have widened by an average 2.26% relative to Treasuries since January. Analysts say weakening market fundamentals are causing investors to demand greater yields before lending to Chinese property firms.

But some are worried that this is not the right time to burst the property bubble. Several prominent economists point out that the recent measures to cool the market may be too drastic, amid renewed fears about the fragility of the global recovery.

Xu Lianzhong, an official with the National Development and Reform Commission’s price-monitoring centre, recently wrote a commentary in the China Securities Journal urging authorities to be cautious when introducing new tightening measures because the “global economic environment is very complex”.

Rough translation from bureaucrat-speak: ‘awful’.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.