City-based and De-inventory Policies Continue in China

Recent market focus is mainly on the latest round of control measures, which aimed at stabilising property prices through raising down payment requirements, controlling leverage and increasing supply etc. This round of control measures has been launched in time, and is expected to gradually achieve its goal of stabilising home prices.

The de-inventory policies earlier mistakenly led to too much capital flowing to first and second-tier cities, resulting in continuous rising property prices. Therefore, the new around of control measures, targeting first and second-tier cities, is to cool the markets by limiting purchases and loans. To reduce inventory, the People’s Bank of China reduced reserve requirement ratio and interest rates, which created over-loose credit. The latest restrictions on loans can reduce the leverage of property market, and hence lower the possibility of financial crisis resulting from home price adjustments. The government is expected to closely monitor the over-heated cities, and further launch or tighten the regulations, if necessary, in order to curb improvement and speculation demand; at the same time, to sell more lands in first and second tier cities in order to increase supply.

Since the property markets in different cities are divergent, the central government is expected to continue adopting policies based on each city's different circumstances. De-inventory policies are likely to be launched in third and fourth-tier cities with high inventory, where some low down-payment policies may be seen. Third and fourth-tier cities face great de-inventory pressure, affected by factors like economic transformation, demographic structure, and supply being greater than demand etc. The government has been encouraging rural residents to purchase houses in small and medium sized cities, offering them financial incentives like tax reduction, subsidies etc. On top of that, the government can extend the pilot area for urbanisation, enhance household registration system reform, and loosen the requirements for moving to urban. Besides, more comprehensive support can be provided to rural residents who move to urban, like creating more employment and inviting industry development, in order to let more rural residents work or start their own businesses near the urban areas where they move to.

Regarding the impact of the control measures on home prices, it is believe that significant drops are unlikely. Slash in property prices may happen only when the overall real economy slides. Currently, China still maintains mid-high rate of growth, with 6.7% y-o-y rise of GDP in Q3 this year, which is in line with market expectations and same as the previous 2 quarters. Home price may grow slower in Q4 and next year, but is still expected to go up steadily.