Is it healthy to see a slowdown in China?
It seems that even the Chinese economy is struggling to come to terms with the financial meltdown across the world as the authorities announce a number of measures aimed at boosting the flagging domestic property market. It has also been revealed that economic growth is slowing although as a strong trading partner to the US and European markets this was always going to happen at some stage.
Among the new moves announced by the national government are :-
Lifting of stamp duty
As of the 1st November the authorities will suspend the payment of stamp duty on property purchases in an attempt to inject some more interest into the market by bringing down the actually cost of buying a property. When you consider the size of the Chinese property market this is no small giveaway!
Lifting of value add tax on sales
In tandem with the suspension of stamp duty on property purchase it has also been announced that VAT on property sales will also be lifted from the 1st November. Again, this should ensure that not only will property investors have more money to plough back into the property market but the economy should benefit as well.
Reduced deposits for first time buyers
As the property market in China began to pick up and was in danger of over heating, the government brought in a number of measures to try and curb over eager buyers. One such measure was the insistence on a substantial deposit for first time buyers acquiring a property but from the 27th October this relatively high figure will be slashed to bring more first time buyers into the market.
National mortgage rate reduced
In order to reduce the cost of acquiring a property in these troubled times the government has also announced a 27 basis point reduction in the headline mortgage rate. It is hoped that by bring in more first time buyers they should be able to take up some of the slack from other property investment groups.
One year lending rate cut
As if making way for the above mortgage rate reduction, the authorities had already cut the base rate by 27 basis points to 6.93% on the 8th October. However, unless the economy and the property market (the two are very closely linked) react in a positive manner to the announced changes we could see more rate cuts in the short term.
Economy
While there is some disappointment that growth in the Chinese economy has fallen to ‘just’ 9% in the third quarter of 2008 in many ways this ongoing slowdown could actually be a blessing in disguise. While the 9% growth figure is the first time growth has fallen to single digits since 2005, and the lowest rate of growth since 2003, there was no way that the economy could carry on at that pace without storing up trouble for the future. Many countries would be alarmed at a growth rate of 9% let alone growth which over the last few years has been measured in double digits!
Even though the government have been fairly swift to react, after a number of local authority plans were instigated, there are still grave fears that the economy could well slow further with a knock on affect from key markets such as the US and Europe said to be behind the fears. When you consider that China is now in the top league of worldwide economies and has enjoyed an extended honeymoon of late there can be no surprise that it is set for its first rocky patch for some time.
Property market
While the property data across China is very mixed to say the least, a 0.1% fall in property prices between July and August is the first time we have seen consecutive monthly falls in many of the country’s 70 major cities. However, this figure announced by the national authorities does not quite tally with information the local authorities have been releasing about their individual property markets, which show much steep falls than the national figure.
There is also great concern about how the property slowdown will impact upon the overall Chinese economy as the property sector accounts for over 20% of all fixed asset investment in China. We also need to consider the fact that literally millions of Chinese nationals have entered the property market since the boom started with many investing their savings in the sector – a crash or sharp fall in prices would have a major impact in many areas of the Chinese economy.
The future
The national plans detailed above are the next stage in a revival plan which started some months ago at local authority level. It seems as though the Chinese government is very keen to ensure that the worldwide slowdown does not drag the Chinese economy any lower although you have to say that they will have a battle on their hands.
However, when you look towards the longer term there is no doubt that China still has a lot of unfinished business in the development stakes and the economy will surely bounce back soon rather than later. The commodities market needs the Chinese economy to hold up because single handily the country has dictated the growth in areas of the market such as steel.
Conclusion
While the national authorities seem very keen to ensure that the property market and the economy as a whole do not fall too far back there are many who will be a little relieved that some of the pressure is being taken off. There was no way that the economy could keep up the double digit growth rate without serious threat of boom and bust and the strengthening of inflation.
If the Chinese property market falls back too far and loses some of its froth there may well be an opportunity to pick up some interesting investments. However, the property market across China can vary dramatically and you need to be very careful where you invest your funds.