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China central bank faces decisions as housing slump looms

 TOKYO -- The Chinese central bank has issued instructions to major banks in a bid to avoid a credit crunch amid growing concerns that a slump in the housing market will increase downward pressure on the Chinese economy.

     On May 12, the deputy governor of the People's Bank of China, Liu Shiyu, directly told officials in charge of 15 major Chinese banks that mortgage loans should be extended to first-time buyers on a preferential basis and that loan applications from clients meeting certain terms should be facilitated.

Real estate myths

Key economic data for April released by the government the following day justified concerns about the economy. The growth of investment, production and consumption slowed from the previous month across the board especially due to declines in housing investment and home sales.

     A luxury condominium in Chengdu in the inland province of Sichuan cut its prices per square meter by over 30% in March to 13,000 yuan ($2,081), down from 19,000 yuan in a bid to prioritize the collection of invested funds. Price cuts were also implemented in major regional cities such as Hangzhou in Zhejiang Province, and Dalian in Liaoning Province. The word in China is that the housing bubble has burst.

     A slowdown in housing investment and a drop in home sales not only exert direct downward pressure on economic activity but also have a chilling psychological impact. According to official data about 70 major Chinese cities compiled by the National Bureau of Statistics, prices of newly built homes dropped in April from the previous month for eight cities. This is double the number for March.  The cities where prices remained level also increased, while the margin of price rises narrowed.

     This exposes the myth that real estate prices keep rising. As turbulence in the housing market looms large for the nation's economic outlook, calls for monetary relaxation grow stronger. Wang Jianhui, director of the Institute of Capital Securities, said the ratio of reserves to deposits should be lowered by June to create favorable effects on the economy in the second half of this year. 

Bold stimulus unlikely

The People's Bank of China Governor Zhou Xiaochuan is holding expectations for monetary relaxation in check. At a financial forum held at Tsinghua University in Beijing on May 10, Zhou said the central bank will avoid any bold easing of credit. Premier Li Keqiang has also repeatedly denied the possibility of the Chinese government resorting to a huge set of stimulus measures similar to the four trillion yuan package adopted following the Lehman Shock of 2008.

     Even President Xi Jinping calls China's gradual economic slowdown a "new normal" and calls for markets to accept the current situation. Chinese leaders thus continue to adhere to their policy of prioritizing structural reforms while tolerating an economic slowdown to a small extent.

     Nevertheless, the Chinese government continues with piecemeal measures to underpin the economy, including the acceleration of railway and other infrastructure projects. The PBOC, while denying the possibility of bold credit easing, resorted to "guidance" for the smooth extension of housing loans in line with the government stance.

     The municipal government of Nanning in the Guangxi Zhuang Autonomous Region partially relaxed restrictions on home purchases from outside the city, effective from April. Other regional cities, such as Wuxi, Jiangsu Province, and Tongling, Anhui Province, have also adopted measures to support home buyers. But fragmented adjustments cannot push economic activity into high gear, though they may help prevent a rapid deterioration of the economy.

     The housing market in China declined just before and after the 2008 global economic downturn and also following the 2010 reinforcing of restrictions on home purchases by then Premier Wen Jiabao. The market could shake off the slump in both cases thanks to the government's four trillion yuan stimulus package and monetary easing, which was exercised from the end of 2011 until the summer of 2012.

     But the huge stimulus package and aggressive easing of credit have led to an excess of manufacturing capacity and the growth of shadow banking fed by excessive liquidity. The administration of then President Hu Jintao failed to address these problems out of fear of an economic slowdown. The same result could be repeated if the current government resorts to stimulus measures without serious consideration.

     The Chinese economy is the same as a bicycle running on a rough road, said Tsinghua University professor Li Daokui, a former member of the PBOC monetary policy committee. The bicycle requires delicate maneuvering. A bumpy road lies ahead for the PBOC.


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