Fundamentals will Cushion Against Housing Collapse

CHINA - Report 22 Aug 2014 by FAN Gang and Chunyang Wang

Executive Summary

Fixed asset investment increased just 15.7% y/y in real terms in July, its slowest rise this year. Industrial output also dipped, rising 9% y/y, slightly less than in June. We expect the government to respond by increasing investment, given its healthy budgetary situation. We forecast overall economic growth as stable, and believe the annual target of 7.5% GDP growth is achievable.

Retail sales of consumer goods rose 12.2% y/y in nominal terms in July, down 0.1 pps from Q2. The CPI rose 2.3% y/y, flat on June. The ex-factory price index of industrial products fell -0.9% y/y, and PPI fell -1.1% y/y. Both indices narrowed over the past four months, though we expect a rebound after July, given the higher late-year base numbers in 2013.

Exports rose 14.5% y/y in July, up 9.6 pps from Q2. However, industrial export delivery values rose 7.2 pps, up only 0.5 pps. So the exceptional export performance may not persist. Imports declined by 1.6% y/y, driving the trade surplus up dramatically, to $47.3 billion monthly.

Key financial indicators have performed unusually for the past two months, due to seasonal factors. By the end of July, M2 was up 13.5% y/y, falling back to May levels; M1 had increased 6.7% y/y, lower than in June, but still higher than in May, which indicates a still relatively loose monetary policy.

Of 70 major cities, 64 saw m/m price declines for new homes in July, vs. 55 cities in June, the National Bureau of Statistics (NBS) said in a statement. Previously, limitations on real estate purchases and mortgages were implemented in 46 major cities. Until August 17th, 37 of these 46 cities had eased their restrictive policies on real estate purchases and mortgages. We expect housing prices will continue to decline despite such easing, but that a price collapse is unlikely. Local governments’ easing policies might signal to home purchasers that the housing market is cooling, while purchasers take a wait-and-see approach. But, given China’s strong economic fundamentals, such as overall 7% GDP growth, continuing urbanization, and the proactive bubble prevention policies of in past years, the likelihood of a general market collapse is remote.

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