Even as China’s economy grew faster in December than before the coronavirus pandemic struck, the country’s property market struck a more downbeat tone.
While new home prices across the country’s biggest cities rose 3.7 per cent last month compared with a year earlier, the pace of growth was the slowest since early 2016 and prices were up only marginally from November.
The data were a signal of the success of new government measures designed to cool the market and curtail developers. As with asset prices around the world during the pandemic, low interest rates combined with higher savings have stoked concerns that the Chinese property market was overheating.
But the weaker growth also drove to the heart of a challenge facing Beijing: how to contain the property sector and reduce the financial and political risks it poses without sacrificing its enormous contribution to economic growth.
“The government doesn’t want property prices to keep rising and rising,” said a researcher at a state-run think-tank, adding that continuous increases were “politically not acceptable”.
Along with buoyant industrial output and soaring exports, property was one of the standout economic performers last year in China, which is expected to be the only big economy in the world to have expanded in 2020.
Property investment rose 7 per cent over the full year compared with an overall increase of 2.9 per cent across all types of fixed asset investment. China’s steel production last year hit its highest level ever and residential sales as measured by floorspace leapt 15 per cent, according to S&P Global Ratings.
Shaun Roache, an economist at S&P, said property led China’s recovery from the pandemic but was “going to play a smaller role for sure in terms of growth” in 2021. He estimated that the sector still accounted for about 20-25 per cent of the economy once its contributions to employment and investment were factored in.
An impetus to reduce reliance on property in China is not new. In 2017, President Xi Jinping said that houses were “for living in, not for speculation”. Growth over the past year was projected to be just 3.1 per cent in December 2019, based on a Reuters poll.
But the campaign has gained additional momentum under coronavirus, alongside a push to rotate the Chinese economy towards domestic consumption and high-end manufacturing under the latest five-year plan.
In August, the government informally unveiled its “three red lines” policy, which targeted three balance sheet metrics of leverage in the property developers. The largest of them, Evergrande, is seen as an important participant in the financial system — as well as an emblem of the country’s high levels of debt.
Beijing in recent weeks has taken further steps to control the sector by addressing debt specifically. At the end of December, new rules limited bank lending to developers and capped their mortgages against their total loans. At the end of the third quarter of 2020, loans to property accounted for 29 per cent of total renminbi loans, according to People’s Bank of China data.
Zhou Hao, an economist at Commerzbank, said the move was an “important policy change” because long-term property lending would probably “crowd out” the flow of credit to other sectors.
He suggested the regulations aimed to encourage banks to lend to the manufacturing sector and private firms to “boost long-term growth potential”.
The rules do not necessarily limit lending to real estate, but cap it relative to the size of total bank lending — meaning property-related credit can still grow if overall lending rises.
“If you think about the . . . scenario of lending not increasing, that’s extremely rare,” said Nicholas Zhu at Moody’s in Beijing. “Even when the economic activities were collapsing in the first quarter, lending was going up.”
The extent to which the government will be able to restrict the flow of financing remains uncertain, especially as property often relies on local market dynamics. In large cities, growth has remained stronger than elsewhere and several municipalities have introduced their own measures to control prices. But local governments are often fiscally reliant on land sales to developers.
Andrew Collier, managing director of Orient Capital Research in Hong Kong, said the government was “much more effective at controlling credit than they were five or 10 years ago”. But he added that both banks and parts of the shadow banking sector had ways of “gaming the system”.
The broad availability of money will in part depend on interest rates. While many expect the PBoC to raise rates in 2021, others point to continued low or negative rates of inflation, which effectively increase borrowing costs.
The challenge of managing interest rates given the unbalanced economic recovery is one explanation for the targeting of property, which Mr Roache said was one of the four main drivers of policy in China, along with monetary, fiscal and macroprudential policy.
“You already have three levers that are being pulled tight at the moment,” he said. “I think if they pull too tight on housing as well, there is a risk that growth could undershoot.”
Additional reporting by Sherry Fei Ju and Ryan McMorrow in Beijing
Coronavirus business update
How is coronavirus taking its toll on markets, business, and our everyday lives and workplaces? Stay briefed with our coronavirus newsletter.
Sign up here