Yesterday evening I stopped to take a look at the twin towers at the Vauxhall end of the Nine Elms development which look nearly complete. As they have changed hands they symbolise the problems that China is experiencing in the real estate sector and we can this morning take a further look at the numbers for the domestic state of play.

BEIJING: China’s new home prices dropped for an eighth straight month in February, official data showed on Friday, suggesting the fragile property market is struggling to find a bottom despite a slew of measures to shore up the sector.

New home prices fell 0.3% month-on-month, in line with January’s decline, according to Reuters calculations based on National Bureau of Statistics (NBS) data.

On a year-on-year basis, prices fell 1.4 per cent, faster than the 0.7 per cent drop in January and the biggest decline in 13 months. (Reuters)

As you can see they are singing along with Paul Simon.

Slip slidin’ away
Slip slidin’ away
You know the nearer your destination
The more you’re slip slidin’ away

Whilst I see some arguing that there is an easing because the monthly fall has slowed from 0.37% to 0.36%. If only the figures were that accurate! But the real issue is in line with my theme that the ending of the previous boom will cause trouble as around 30% of the Chinese economy depended on it. The whole psychology was based on a version of what economists call “free money” where it does not matter how much you pay or how shoddy the building was you ended up with a profit. But now that is over and according to the official figures there is a pretty consistent decline ( -0.45%,-0.37% and now -0.36%). I do not know what is Chinese for negative equity but I am sure that minds will be thinking about it.

If anything it looks as though the declines are broadening.

Home prices fell in 59 cities in February, up from 56 the previous month. Three of the four first-tier cities, including Beijing and Shenzhen, registered a month-on-month decline in prices last month. (Reuters)

Also maybe developers are under pressure to hold up prices for new homes as the situation is worse for existing ones.

Existing-home prices dropped 5.2% year on year, worsening from 4.5% in January and falling in all 70 cities. They declined 0.62% month on month, improving from a 0.68% decrease in January. (Bloomberg)

I think the fact that they are falling in all cities is rather eloquent.

Consumption Problems

One way of looking at the Chinese economy is that it has too much investment and too little consumption. The central banking argument that higher house prices create wealth effects via more consumption is not going so well with house prices falling as this from Reuters points out.

“Declining property prices will create a negative wealth effect, acting as a headwind to consumption,” said Lynn Song chief economist, Greater China at ING.

A week or so ago Bloomberg were pushing the reverse argument.

For Kim Li, a school teacher in a southern city in China, the decision to delay buying a house has freed up cash for spending on tourism.

“I have seen the quality of life of my friends drop significantly after they bought houses,” the 28-year-old said. “Now we are more willing to spend money on traveling, to see the world and not let housing tie our lives down.”

Our valiant Bloomberg journalist does not seem to have spotted that this will boost consumption in other countries so is far from the best example. Perhaps Goldman Sachs is taking people for muppets again.

But many economists including at Goldman Sachs Group Inc. argue that China is different.

Regular readers will know I am a fan of lower house prices to make them more affordable for first-time buyers. But the issue as an economy that has got distorted via the “free money” I described earlier.

Government Intervenes

Considering the situation one might reasonably think that less government intervention is needed here. But as the South China Morning Post has outlined today we are getting more of it.

The local government in Hangzhou, the capital of eastern Zhejiang province, has taken another drastic move to ease home-purchase restrictions in the city, after an effort last year failed to rejuvenate the housing market. The city, home to China’s tech leaders including e-commerce platform operator Alibaba Group Holding and carmaker Geely Automobiles, removed curbs on second home ownership with immediate effect, joining other top-tier mainland cities in breaking down barriers and ending a three-year slump nationwide.

I am rather unclear as to how they can declare a three-year slump has been ended by this, but anyway. Indeed this is contradicted later.

Cities like Nanjing, Hefei and Suzhou, which have lifted home purchase curbs, have yet to see a major recovery, she noted.

What we have seen from the Chinese authorities is a type of hokey-cokey policy.

Hangzhou erected some of the toughest barriers to cool price speculation before the current industry slump.

So they pumped it up, then they slammed on the brakes and now they are back trying to put air back in the ball. This has created issues for local government which got heavily involved in the boom.

China’s central government has rolled out a new round of measures since the second half of last year to help local governments swap or restructure their off-the-books borrowing in a bid to control debt risk. ( Caixin Global)

Indeed it did so on a grand scale.

However, the sheer scale of the country’s local government hidden debt — up to more than 70 trillion yuan ($9.8 trillion) according to some estimates, more than twice Germany’s GDP — means that the measures at best are far inadequate and will provide only temporary relief to what experts say is a looming liquidity crisis for regional authorities. (Caixin Global)

So now some of the efforts are being shouldered by the People’s Bank of China.

SHANGHAI/SINGAPORE, Feb 20 (Reuters) – China announced its biggest ever reduction in the benchmark mortgage rate on Tuesday, as authorities sought to prop up the struggling property market and broader economy. The 25-basis point cut to the five-year loan prime rate (LPR) was the largest since the reference rate was introduced in 2019 and far more than analysts had expected.

The problem is that if we look at previous property crises a 0.25% cut in mortgage rates is likely to have little impact and some would suggest none at all. For example in my home country the UK the response to the credit crunch of bank rate being cut to 0.5% and the start of QE bond buying was not enough. The housing slump also required the Funding for Lending Scheme to subsidise mortgage lending even further.

Comment

Property crises are often seen as a grand slump but they can also be drawn out in that each time you look things are a bit worse than last time. The latter is what we are seeing in China and yet we see more of the same in official policy.

TikTok, shipbuilding and the solar industry are the latest flashpoints in the simmering US-China trade tussle, which is rapidly moving up the political agenda ahead of America’s presidential election in November. (Financial Times)

This was something discussed in the comments section yesterday and we have looked before at the Chinese effort to export and manufacture more with electric vehicles in the van. But as you can see they are hitting troubled water.

The American solar industry, meanwhile, is in uproar over cheap Chinese solar panels, which have helped halve global prices in the past year: a boon for renewable energy developers but a threat to domestic manufacturers as they try to construct a native supply chain fit for the green transition. (FT)

Plus there is the issue that if manufacturing and exports genuinely fixed things then China would not be in its present position. So I am expecting more of the same.

This article was originally published in Notayesmanseconomics and is republished here with permission.