Money supply is always a major factor affecting China’s housing price. Although the short-term housing price tends to be affected more by other factors, in the long term it is majorly impacted by money supply.
China’s broad money supply (M2) had double-digit compound growth in the past ten years and it was as high as 20%-30% during 2009. It is now three times higher than a decade ago. Broad money supply is currency plus deposits, representing purchasing power. With rapid growth in money supply, inflation remains high. Housing prices in first-tier cities doubled in the past ten years. Of course, low interest rates, insufficient housing supply in first-tier cities and rise in household incomes contributed to the high home prices as well.
The balance sheet of People’s Bank of China (PBoC) was reduced by RMB 1,100 billion during February and March, which raised concerns that China is tightening money supply amidst plans of the US to trim its balance sheet. To manage market expectations, PBoC clarified that reducing balance sheets does not necessarily mean monetary tightening and the balance sheet is affected by many factors, like foreign exchange, holiday and seasonality, amongst other factors. Growth of the M2 in April slowed by 2.3 percentage points compared with the same period last year, yet it still remained at double digits (10.5%). Vigers Research believes that China will not tighten its monetary policy substantially this year since the government has to make sure that they can achieve their economic growth target of 6.5%. Growth of money supply is expected to slow down a little bit but remain at a high pace.
In fact, money supply is determined by money demand and they are also interdependent. Under general conditions, money supply is in line with the performance of the real economy. Yet, the growth of money supply continues to exceed economic growth, which currently keeps at a medium-high rate (around 6.5%). It means that a large amount of capital flows to quality assets, where real estate is the most sought after market.
Despite the tightened control measures on the property market, we believe China’s housing price will continue to pick up this year. As we can see in the past, control measures were unable to rein in growth in home prices and as such, home prices were increasing alongside the continuous rise in money supply. Although home prices in major cities is now more expensive when compared with residents’ incomes, it will not hinder the continual growth of home price since China has a very high saving rate. With money supply still growing rapidly at a rate exceeding economic growth, the housing price is expected to remain high.
>> Issue 269: Property market in the Greater Bay Area