Striking Admission By China: "Rising Social Tensions Pose Enormous Challenges To Beijing's Stability"

Data released by China's NBS early last week confirmed that the latest Chinese housing bubble continued to deflate with 70-city housing price data confirming that home price inflation slowed in most cities in November, except in a few lower tier cities where home price inflation re-accelerated. The average, seasonally adjusted property price change was in November +0.7% from October, and up +12.9% yoy. This compares to October's +1.2% mom increase and +12.7% yoy.

Average housing price growth continued to moderate in tier-1/2/3 cities.

While in year-over-year terms, housing price inflation continued to increase in most cities.

As Goldman pointed out, house price inflation decelerated in tier 1/2/3 cities: In tier-1 cities, November price growth was 0.5% month-over-month after seasonal adjustment, down from the 1.0% month-over-month growth in October. In tier-2/3 cities, housing price growth was 0.8%/0.7% month-over-month in November, vs. 1.4%/1.2% in October. In tier-4 cities however, housing price growth re-accelerated to 0.6% mom, from 0.3% mom in October (admittedly, however, only a few cities are included in our definition of tier-4 cities).  Soufun 100 city property price data released earlier this month also showed a similar trend - average housing price growth in the 100 cities moderated to 1.1% month-over-month in November, from 1.7% in October. On year-over-year basis, average price growth went up to 18.7% yoy from 18.2% yoy in October.

As a reminder, China had implemented a variety of measures in October and November, aiming at halting the latest dramatic spike in Chinese home prices, over concerns housing was becoming unaffordable for most local residents.  Following the tightening measures in a number of major cities in early October, property transactions and prices data showed signs of cooling down, especially in top tier cities.

According to NBS’s separate survey on 15 major tier-1/2 cities, compared with the first half of November, 9 cities saw housing prices falling in the second half of November, 2 cities saw flat housing price and the rest 4 cities saw a positive but slower housing price growth. Nationwide real estate FAI growth also decelerated in November. In last week's Central Economic Work Conference, the tone on property market has turned less hawkish compared with earlier in the year, which may reflect the fact that policy makers are starting to be concerned about the downside risks associated with a property market slowdown.

Indeed, in the latest indication that China is waking up to the post-housing bubble realities, on Friday President Xi Jinping appeared to admit that China's economic growth will slow below the government’s 6.5% target. Despite the promise of creating a "modestly prosperous society," Xi warned that China doesn’t need to meet the objective if "doing so creates too much risk", a warning that comes a little late for a country with 300% in debt/GDP...

... and where trillions in freshly created credit was spewed into zombified firms this year, mostly courtesy of the unregulated shadow banking system.

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However, for now the top priority is further deflating the housing market, which will lead to a disinflationary shockwave around the globe, and will come at a time when the annual "blame it on the cold winter" effect is set to reappear for the 3rd consecutive year.

Case in point, as Reuters reports citing a Xinhua Sunday report, Beijing, one of China's hottest residential real estate markets, will step up property controls to keep home prices stable next year.

That, in itself is not surprising; what is, however, is the admission from China's Politburo media mouthpiece, which admitted that "due to speculators" - remember, it is never the central bank's fault for injecting $35 trillion in financial system assets-  prices in the capital are already too high, and rising social tensions pose enormous challenges to Beijing's stability, Xinhua reported, citing the Beijing Municipal Committee.

Here is the actual wording from Xinhua:

Beijing will increase controls on the property market to maintain stable home prices in 2017, said a statement issued after a plenary session of the Beijing Municipal Committee of the Communist Party of China on Saturday.


Housing prices in the capital are already too high, said the statement, and ensuing increased social tension brings enormous challenges to sustainable development, harmony and stability in the city. 


The city will act against speculation and increase land available for building. On Sept. 30, Beijing announced higher downpayments on property purchases and more than a dozen cities have followed suit and tightened purchase restrictions. At the Central Economic Work Conference this month, policymakers highlighted the need to deal with asset bubbles next year.

With statements like this one, consider China's housing bubble popped; furthermore, one can see why social tensions may be rising in Beijing: average new home prices in Beijing rose 26.4% in November from a year earlier, and that's even after slowing for the second month following cooling measures taken by the government. On Sept. 30, Beijing announced a requirement for higher downpayments on property purchases. So far, the aggressively implemented cooling measures have failed to make a substantial dent in the capital's home prices.

As noted previously, China will impose strict limits on credit flowing into speculative buying in the property market in 2017, top officials said at an annual economic conference earlier this month.

The threat, of course, is that China overdoes the "cooling" and what until a few months ago was a relentless housing bubble, it turns into an even sharper, and far more powerful bust.

It is this concern which prompted the Central Bank on Saturday to warn in the Financial News, a newspaper owned by the PBOC, that China needs to keep financial market liquidity stable and regulate its "money gates" to prevent asset bubbles, but it also needs to ensure a lack of liquidity doesn't cause financial stress. This is a tension we touched upon last week when we documented the soaring bond yields on one hand, the result of modestly tighter financial conditions, and the ongoing surge in capital outflows and the plunge in the Yuan, both tied to the excess liquidity - and thus easy conditions - in the market; or as we framed it, a veritable Catch 22 for the financial system.

As Reuters adds, Chinese policymakers face a dilemma as they need to tighten credit to contain debt and speculative investment without triggering a wave of defaults that could destabilize the financial system. The country's leaders have called for a "prudent and neutral" monetary policy in 2017 and for prevention of financial risk, while keeping the economy on a path of stable and healthy growth, according to statements following a key economic meeting this month.

Monetary policy needs to support economic growth and ensure enough liquidity in the interbank market, but also needs to target price stability and pay attention to asset bubbles, Financial News said in the commentary on Saturday. Policies should also be more targeted, the commentary said.

"Maintain macroeconomic stabilization policies, strengthen fine-tuning (of policies), but do not implement big stimulus," the commentary said, but "explore more targeted ways to solve structural problems."

The People's Bank of China has not cut interest rates in 14 months, and as the economy has proved relatively resilient, the central bank has been guiding money market rates steadily higher in an effort to root out speculators.

In short: China is now at the point where any notable deviations from the status quo could lead to either a bursting of the housing bubble, or another surge in prices; to a paralysis in interbank lending and a wave of corporate defaults or another surge in capital outflows and new record lows in the Yuan. The response: it hopes, just like US markets hope that Trump policies will end up being benficial, that things will turn out ok. In the meantime, however, even China now admits that it is running out of time as "rising social tensions pose enormous challenges to Beijing's stability."

Our advice for 2017 to anyone curious where the next crisis will start - look no further than China, which is now not only trapped but any sudden, material change in the status quo can blow the entire house of cards down, with social upheavals just a few steps behind.