Breakingviews - Washington could set the pace for Chinese property

People look at a scale model of apartment buildings in a showroom of the property developer Yango, that became the scene of a protest by property investors, in Xuchang, Henan province, China, February 19, 2019. Picture taken February 19, 2019. REUTERS/Yawen Chen

HONG KONG (Reuters Breakingviews) - Washington could set the pace for Chinese real estate. Home prices are notching up annual increases of nearly 11%, in spite of official restrictions and a cooling economy. It’s a reminder that property remains a powerful potential lever for Beijing to crank up growth. Fallout from a prolonged trade war will determine how forcefully it gets used.

Residential property values have been rising at double digit year-on-year rates since the start of 2019, according to Reuters calculations. That strength has fed into the land market: the premiums over opening prices that developers are willing to pay have ticked up to around 25%, S&P Global Ratings notes, compared to a low of just above 5% last year. The proximate cause appears to be a combination of looser credit – average first-home mortgage rates have nosed down in recent months – and some easing of purchasing limits.

Not all metrics are as shiny: property sales by floor area, for instance, still look weak. But even the country’s notoriously leveraged developers seem healthier – the average debt-to-equity ratio among some 50 mainland-listed companies fell at the end of the March quarter to the lowest level since 2013 – and the hale market is prompting officials to warn about price rises.

In normal times, both buyers and developers like China Evergrande would now be bracing for Beijing’s very visible hand. China’s market is tightly controlled and officials, wary of bubbles, impose a thicket of restraints to keep demand cool, from curbs on multiple home purchases to high down-payment requirements. A hotter market would usually prompt officials to tighten the screws.

These are not normal times, however. Beijing faces the very real chance that the United States will move forward with tariffs of up to 25% on about $300 billion worth of Chinese exports in the coming months, as President Donald Trump has threatened. That would hit growth and force policymakers to act. Property is one obvious solution: the sector drives around a fifth of the economy, Capital Economics reckons. Easing restrictions alone would deliver an immediate jolt to the economy, with the added benefit of giving local governments more capital for infrastructure projects. It’s arguably the biggest weapon in policymakers’ arsenal; it may soon be time to deploy it.


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