Beijing eases as economic data and property prices deteriorate

The People’s Bank of China (PBoC) plans to inject around $81bn into the banking system, according to reports coming from within China yesterday. The move by China’s central bank is partly in response to some obvious stress in the economy and also in anticipation of a period of tight liquidity. It temporarily breathed life back into Chinese equities before they were choked by concerns surrounding falling property prices.

More concerning economic data

Over the weekend, another bout of disappointing economic data hit investor sentiment in the world’s second largest economy. Retail sales rose 11.9% in the year to August, which was softer than an expected 12.1% rise and raises more concerns about the health of domestic demand. The strength of local demand was already under the spotlight due to stagnant inflation growth, soft import data and other indicators which show decreasing amounts of activity at the ground level. Furthermore, the broader economy is also struggling as is evident from the latest batch of industrial production data, which gave the lowest reading in August since the global financial crisis (6.9% y/y vs. prior 9.0%).

The average price of new homes fell in 97% of the country’s largest cities, further exasperating fears about China’s deflating property bubble

An even bigger point of concern for the market is China’s deflating property bubble. Construction and real estate sectors account for around 15% of GDP and are the backbone of many other parts of the economy. To put the size of the market in perspective, China produced more cement in 2011 and 2012 than the US did last century. Domestically, mortgage loans led a massive surge in credit growth in the last 5/6 years and 90% of the urban population own at least one house.

Data out today showed that prices fell in 68 of the 70 cities surveyed by the government during August, after falling in 64 cities in the prior month. This is the most since the government changed the way it accumulates the data in 2011, highlighting that the threat to the economy is real. Also, property sales fell 17.9% and unsold property was 25% higher in July from a year ago.

The PBoC responds

It’s clear why the PBoC is attempting to boost liquidity and give the economy a jolt. However, the PBoC hasn’t directly confirmed any plans to stimulate the economy further. The bank likely doesn’t want to give the market the impression that it’s easing, but the reports on the PBoC’s plans seem to be accurate.

Policy makers’ dilemma

The dilemma for policy makers in China is that they want to support economic growth but they’re also attempting to make hard structural changes and steer the economy away from its reliance on unhealthy growth. The former denotes more monetary easing, while the latter requires a tightening of credit markets to starve some off-balance sheet lending. Yet, Beijing isn’t going to sacrifice the entire economy in the pursuit of structural change, thus it must respond to the weakness in the economy, and we expect it to keep doing so by a gradual easing of policy.