Beijing: Despite fears of bubbles in China’s property and stock markets, Beijing will maintain its stimulus policies and pump more money into the economy until its manufacturing sector recovers, say analysts.
With weak exports dragging the economy down, Beijing was relying on buoyant apartment and share prices to help it meet its target of 8% growth—and does not want to wind back its stimulus measures just yet, they say.
Walking a thin line:A construction worker at a building site in Shanghai. AFP
“Public and private statements by Chinese officials signal clearly that they are not worried about asset bubble prices or overheating, and they are instead concerned about the sustainability of the economic recovery now under way,” Andy Rothman and Julia Zhu, economists at CLSA, said in a report.
China’s economy expanded 7.9% in the second quarter after a 6.1% expansion in the first three months of 2009.
That growth was largely underpinned by a four trillion yuan (Rs28.72 trillion) stimulus package unveiled in late 2008 and 7.4 trillion yuan in bank lending in the first half of this year.
But soaring property and stock prices this year raised fears that much of the money was being funnelled into asset markets for quick profit—rather than the real economy as intended.
Property sales soared by more than 60% in the first seven months of this year and share prices piled on more than 90% in the same period—triggering fears of emerging asset bubbles.
“Asset prices are the very object of policy in China,” said Michael Kurtz, an analyst at Macquarie Equities Ltd in Shanghai.
“China is walking a fine line where they need asset prices to remain well supported while at the same time discouraging dynamics that create bubbles.”
While policymakers have acknowledged concerns about bubble build-up, they have said there are no immediate plans to change tactics.
Premier Wen Jiabao said earlier this month that China’s recovery remained fragile and that it was too soon for Beijing to reconsider its current stimulus policy.
And central bank vice-governor Su Ning was quoted as saying last week that monetary policy would remain loose until the end of 2010.
New data in August suggested the government-funded spending spree was paying off—fixed asset investment was steady, retail sales accelerated and new lending rebounded after a sharp fall in July.
Yet exports, China’s main growth engine, continued to fall in the first eight months of the year.
Kurtz said the government was now relying on the property market to drive the economy.
“Until the export sector picks up, the domestic property story is going to be the main driver of Chinese growth,” said Kurtz.
“China needs construction to resume and remain robust next year and that won’t happen unless China leaves in place policies that sustain confidence in property prices and sustain relatively high transaction volumes in the residential property market.”
Kurtz said policymakers knew their actions could cause asset bubbles to build up and were trying to “stage manage” investment in property and stocks to keep things moving at a “more measured pace”.
The government’s strategy was to keep potential property buyers and investors “constantly guessing or wondering whether or not policymakers intended to put a more rigid cap on things”, he said.
The latest example came Friday when chairman of the China Banking Regulatory Commission Liu Mingkang said bank lending had “surged since the beginning of the year, with a variety of risks”—but offered no concrete solutions.
Andy Xie, an independent economist based in Shanghai, warned the government’s measures had already created a “gigantic bubble” in the property market.
“Whenever you see prices so much higher than the normal range, it is a bubble,” Xie said.
“The average urban property price per square metre is the same as in the US while the US per capita income is seven times of China’s urban per capita income.”
Xie said the government had taken the easy option of boosting asset prices to create a “sense of well-being” rather than resolve deep structural imbalances in the economy.
“In the short term it looks like everyone is winning and the reason the government is doing this is because it is so hard to reform” the current system of relying on exports for growth, Xie said. AFP