How far will China’s leaders go to stabilise the economy?

Recent days have seen a flurry of policymaking as officials scramble to arrest the growth slide. Local governments are being told they can bring forward next year’s infrastructure spending, and funding rules for infrastructure projects are being further relaxed to boost investment.

The People’s Bank of China capped last week with a widely expected 50 basis-point cut to the reserve ratio requirement, which is the level of deposits that banks must hold back, releasing about Rmb900bn ($127bn) into the financial system.

The policy stance is likely to be relaxed further as the government continues its gradualist approach to supporting the economy, with official borrowing costs expected to fall further after last month’s overhaul of China’s interest rate-setting regime. The government sees employment as a key risk and has also pledged more stimulus policies targeting consumers and their incomes.

The laundry list of support measures is lengthening, but is still nowhere near the big bang stimulus seen during the global financial crisis or during the market turmoil of 2015 and 2016. 

The government’s abstemious approach to stimulus this time round is most clearly shown in its treatment of the housing market. Despite concerns among some analysts that consumers are tapped out after years of borrowing, the government could view the loosening at a national level of restrictions on the purchase of apartments as a way of giving the economy a short-term boost — the IMF has estimated that property and its ancillary industries make up a third of China’s gross domestic product.

However, for all of the pressure created by the economic slowdown, the Chinese leadership still sees financial risk as a threat to national security, and believes the property market is a unique generator of that risk.

In a long-awaited move from its previous regime for setting benchmark rates, which were decided by the State Council and published by the PBoC, the loan prime rate has been identified as the market’s new benchmark lending rate, formed from quotes from 18 institutions and based on the PBoC’s medium-term lending facility.

Although one intention of this reform is to guide borrowing rates lower, the PBoC has said this does not extend to mortgage rates, warning lenders that these cannot be priced at a discount to the loan prime rate for first-time buyers (mortgages for buyers of second homes will be subject to a floor of the loan prime rate plus 60 basis points).

Repeating the leadership’s maxim that “homes are for living in, not for speculation”, deputy governor Liu Guoqiang said at a briefing last month that “one thing that’s for sure is that mortgage rates will not fall”.

Prohibiting discounted mortgage rates is a demonstration of the government’s commitment to holding the line but it will not have much near-term impact on the market. Just 7 per cent of the 300 Chinese developers surveyed by FT Confidential Research said first-time buyers were getting discounts in August. This compares with 56 per cent in August 2016, when the government was still encouraging people to buy property in an effort to shore up economic growth.

Mortgage rates for first-time buyers averaged 5.47 per cent in August, according to data provider Rong360, versus the one-year loan prime rate of 4.25 per cent and the five-year rate of 4.85 per cent.

The headline FTCR China Real Estate Index rose to 50 in August, suggesting that market conditions did not deteriorate last month, but neither did they improve. The results indicated that sales fell for a third consecutive month, if more slowly than in July.

Activity tends to improve in late summer and gather pace in the run-up to the Golden Week holiday at the start of October, which is the peak time for sales. However, the shift in the government’s treatment of the housing market has had a palpable effect on the yearly cycle — asked about sales in the coming month, just 29 per cent of developers said they expected improvement, the smallest number for an August in the seven years our survey has been running.

Furthermore, while the property price index pointed to a seventh consecutive month of increases, they have been rising at a much more subdued pace this year — 18 per cent of developers have reported house prices rising so far in 2019 (with 73 per cent seeing flat prices and 9 per cent witnessing declines), compared with 24 per cent last year and 30 per cent in 2017.

The government has confounded expectations that it would loosen housing policy to boost the economy, though its commitment to holding the line will be tested if the growth conditions deteriorate. The economy, which officially expanded at 6.2 per cent in the second quarter, is likely to grow at the lower bound of the official 6 to 6.5 per cent target this year thanks to a modest boost in infrastructure spending.

With no end in sight to the US-China trade war, and incremental moves such as the reserve requirement cut insufficient to address the economy’s credit problems, the slowdown risks extending into 2020. Once unthinkable, sub-6 per cent growth looks likely to become a reality. 

Consumer sentiment has held up so far, flattered by the wealth effect created by the housing market’s resilience (nearly 40 per cent of households own two or more properties, our survey has shown). However, households are vulnerable to the slowdown seen in cooling real estate sales, price and investment growth.

The Chinese government believes it still has levers to pull in trying to right the economy and does not yet need to resort to stimulating the housing market. This is why it is leaning on local governments and infrastructure investment to support growth. 

But pressure to give way will build if the authorities fail to arrest the economy’s slide. 

The FTCR China Real Estate survey is based on interviews with 300 developers in 40 cities. For further details click here. This report contains the headline figures from the latest Real Estate survey; the full results are available from our Database.

FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and south-east Asia. Our team of researchers in these key markets combine findings from our proprietary surveys with on-the-ground research to provide predictive analysis for investors.