Mainland China’s housing market boomed last year when fiscal and monetary conditions were eased and lockdowns lifted, just as happened in many other countries. This unintended rebound helped the economic recovery but has raised concerns about financial risks.

Beijing has rolled out a range of macroprudential policies to tighten developers’ debt financing and sales since late 2020 but property investment has remained strong.

Property-market policies have been used as counter-cyclical tools before, but during the pandemic Beijing limited fiscal or monetary stimulus, instead targeting support on economic weak links such as smaller firms.

Rather than ease property financing, as in previous downturns, central government has this time shown concern over runaway home prices. Hard-line macro-prudential rules are aimed at restraining property financing for both developers and homebuyers while local governments impose tougher rules on home-buyers.

Even so, property investment has remained robust and has been a key driver of economic growth in 2021. In contrast, infrastructure investment weakened rapidly after local government financing was moderated.

One reason is that developers have found other sources of finance, including deposits and buyers’ advance payments, which now account for 39 per cent of their funding. Pre-sales are more than 50 per cent above their depressed 2020 levels.

Another reason may be that developers are building more quickly and finishing projects that were started but suspended. Also, large cities now restrict the frequency of land auctions to three times a year and developers are stocking up.

Nevertheless, we expect construction investment, particularly in property, to moderate together with a slowdown in property sales growth. Mortgage lending growth has already slowed and rising mortgage rates, stricter home-purchase curbs and longer re-sale bans make the downward trend likely to continue.

Developers’ on-balance-sheet financing is already slowing but new measures aim to limit access to off-balance-sheet funding too. They are thus likely to start reducing land purchases and new housing starts to improve their cash positions.

It will be a gradual process however. Completing unfinished units will support construction activity, but if funding conditions tighten further, property investment will likely weaken this year.

Construction investment in mainland China has been a key driver of the global commodity cycle.

The country now accounts for over half the global use of aluminium, copper, nickel, iron ore, zinc and thermal coal. Its investment-led rebound last year thus boosted commodity demand strongly, contributing to a strong bounce-back in prices.

But a slowing property sector means construction investment in China is unlikely to drive another commodities super-cycle and recent infrastructure investment growth has been lacklustre compared with previous policy-driven recoveries.

So we expect at least some stabilisation in global commodity prices in coming months and thus see mainland China’s producer-price inflation falling from a 13-year high of 9 per cent in May to 6.5 per cent by October-December.

This transitory inflationary pressure should not trigger broad-based monetary tightening measures and consumer-price inflation should remain muted. Moreover, small businesses and manufacturers still need continued policy support as surging commodity prices have squeezed their profit margins.

First published 30th June 2021.

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