Maarten-Jan Bakkum, senior strategist, multi-asset, responsible for Emerging Markets at ING Investment Management, on why real estate growth is China's weakest link…
Due to the high inventory of unsold houses and the negative sales and price momentum in China, real estate construction is likely to remain weak in the coming quarters. The outlook is particularly negative in the cities below provincial-capital status, where migration is negative and where supply growth has been very high over the past years thanks to abundant shadow-banking financing and aggressive land sales by cash-hungry local governments.
Eventually, after years of low or negative new land sales and housing construction growth, house sales and prices should start recovering. But at the moment we are still in the correction phase. This is clearly visible in the most recent housing investment data. Investment growth in new real estate fell into negative territory in December, for the first time since 2009, to -3%.
The -3% is one of the reasons why the People’s Bank of China has eased monetary policy further and why the authorities are likely to come up with more stimulus in the coming months. The export sector is struggling, consumer demand growth has been resilient but has started to level off, infrastructure investment growth is under a lot of pressure due to fiscal problems at the local-government level, but real estate investment growth is the weakest link. A prolonged negative sentiment in housing can spread out and cause problems in consumer confidence and lead to more capital outflows.