China Real Estate Growth Seen as Savior, But Could Be the Devil in Disguise

One of the major data points this week was China Flash PMI, which showed growth in China manufacturing is slowing. While there were other important developments this week, the weakening data out of China should be of particular concern to investors.

Countless economists, analysts, and gurus have warned recently that further slowing in China is a huge risk to global markets. It should also be noted China has recently indicated it will make efforts to stimulate its economy -- a reversal to mostly ambiguous signals from China previously. How far China will go to stimulate its economy will largely depend on how much softer the economy gets.

There is speculation this week that if the economy continues to slow, China might loosen tight controls on the property market there. On Thursday, UBS economist Tao Wang said there has been a “constant push” for the central government to ease current restrictions.

As of now, China has limited many types of real estate purchases including multiple purchases by a single buyer. These rules are meant to limit over speculation and a potentially dangerous housing bubble.

However, as manufacturing in China continues to weaken, and with China’s rate cuts doing little to improve growth, many in China are saying lifting the housing restrictions is an option.

Real estate values dropped 1.6 percent in Shanghai in the past 12 months ending in May. Shenzhen prices fell 2.3 percent, and in the eastern city of Wenzen, they dropped 14 percent. However, despite the declines, China’s government is still reluctant to ease the restrictions. If growth in China continues to soften, the government’s stance could change later this year.

Like other governments in Europe and in the U.S., China is having difficulty managing the economy. And the situation there appears to be turning into another case similar to what we have in the U.S. where bad news is good news as long as leads to stimulus. 

The dangers of these types of policies are obvious, as many doubt that the central banks in U.S. will be able thread the needle regarding growth. It won’t be long before those same investors begin to doubt China’s threading skills -- if they haven’t done so already. In the end, the housing market regulation and deregulation might be a devil in disguise for China’s government.