Until this weekend's Cyprus black swan, the biggest red flag facing the market was the threat of persistent Chinese inflation, manifesting itself in very sticky and upward rising home (and many other) prices. In fact, quite recently the new Chinese leadership encouraged "bold" and aggressive steps to tame real estate inflation and instituting fresh curbs on house appreciation "speculation", which is a natural byproduct in a nation that has an underdeveloped and untrusted capital market - unlike in the US where the S&P absorbs all the Fed's reserves (with no money multiplier impact) keeping inflation elsewhere largely tame. It is this inflation that has kept the PBOC not only on the global "reflation" sidelines, but forced it to withdraw liquidity with several record repos in the days following the Chinese new year. It is also the downstream effects of this inflation that has pushed the Chinese stock market red for the year. So just how much of an issue is the soaring Chinese real estate market as global liquidity makes its way to triplexes in Shanghai? The chart below [12]explains it all.
[13]
More from Reuters [14]:
Average home prices in 70 major cities across China rose 0.3 percent in November from the previous month, after a 0.05 percent rise in October, according to Reuters' calculations from data released by the National Bureau of Statistics on Tuesday."The risk of tightening property curbs is accumulating due to rising home prices along with reviving economy and stabilising investment," said Zhao Xinkui, a property analyst with Huarong Securities in Beijing.
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Such a modest rise in home price, if turned into a steep rebound next year would fuel market uncertainty over the risk that Beijing will seek to further stifle the property market through controls.
China's fight against property speculation has headed into its third year but the middle-class Chinese are still priced out the of the urban housing market.
A recent uptick in land costs - typically a prelude to home price rises - have changed market sentiment and pushed would-be home buyers back to the market in a bid to beat increases.
China's top state think tank warned last week that China should enforce new property controls next year to curb speculation and prevent an expected modest recovery in house prices from turning into a steep rebound.
The view was echoed by analysts.
"The Chinese government would like to keep the stability of the real estate market. If home prices and sales rebound too quickly next year, the government might unveil fresh tightening policies, including expanding property tax beyond Shanghai and Chongqing," said Liu Yuan, a head of research at property consultancy Centaline.
Keep in mind that the only thing responsible for some 50% of the upside in the market is the global reflation effort, which at last check has amounted to nearly $15 trillion in liquidity injected by central banks. Said reflation is not expected to end any time soon.
Correction: the only thing that could end it, would be China to make its case, loud and clear, to the world that it will no longer tolerate soaring housing prices as speculators park cash not in the Shanghai Composite but in mainland house. What will be the catalyst? The same one every time - social unrest and public anger over unaffordability of homes. For now, banks are happy to fund the capital deficiencies, but soon that too will end. When it does, and when China makes its case against the global coordinated printing, sell first and ask questions later.