China cannot afford to stop housing speculation just yet

When he finishes negotiating his “deal” with China, US President Donald Trump will probably try to take credit for the country’s shrinking current account surplus with the rest of the world.

However, the fact that China’s exports are slowing is not a new phenomenon, and it is not necessarily a reason to celebrate.

First, the good news: China’s decline in current account surplus in the decade after the financial crisis (between 2008 and 2018) was the second-largest in the world, after Saudi Arabia’s, whose decline has a lot to do with the falling price of oil.

This is a structural change. For example, as China’s middle class grows, they travel abroad more. This increase in outbound tourism contributed to turning a small surplus in the services trade balance into a deficit of 2.2% of gross domestic product, according to a recently published IMF Working Paper.

The goods surplus has also fallen; the manufacturing surplus, although “still sizeable”, as the IMF paper puts it, “has plateaued, consistent with the pace of trade integration.”

The world’s second-biggest economy is rebalancing towards a more domestically-oriented one, from the export powerhouse it had been since China joined the World Trade Organisation in 2001.

China's current account surplus shrank

China’s current account surplus shrank in the decade since the financial crisis. Source: IMF

But unless the Chinese government continues to stimulate the economy, it is unclear how smooth the rebalancing will be in the near future.

Much of the current growth in China has been, one way or another, tied with the advance of the property sector, as the construction sector has flourished.

This looks robust enough for now — property investment grew at a healthy pace of almost 10% in the third quarter.

But starting with the spring of 2020, several headwinds are likely to appear in the Chinese housing sector, according to Societe Generale analysts.

They note that sales of residential property were boosted in the second quarter of this year by a relaxation of the Hukou system of permits, which restricts residency in certain cities.

Some criteria were relaxed in order to attract talent, which led to rising demand for housing. However, they were swiftly tightened again, to contain the housing bubble that developed in certain cities.

On the other hand, reduced policy support for the redevelopment of shantytowns in lower-tier cities has curbed property sales in these cities.

Besides, household income growth has been slowing in the past three quarters, from almost 7% year-on-year in the first quarter of 2019 to barely above 6% in the third quarter, the analysts also noted, which does not bode well for demand.

And, as usually demand for housing increases in expectation of further house price growth, if property price growth moderates or reverses, this will weigh heavily on the future of China’s construction sector. There is already anecdotal evidence that some developers offer discounts of as much as 20% to entice buyers.

It does not help that the “top leadership is now strongly adverse to housing speculation and the perception that the sector plays a major role in driving economic growth,” as the analysts at Societe Generale noted in their research.

Having said that, it remains to be seen if this adversity to property speculation in China will continue on the backdrop of subdued global economic growth expectations.

President Trump’s decision to impose tariffs on imports from China and Europe is not affecting only exporters in these regions. The entire global economy is slowing because of this.

If the Chinese government wants to maintain China’s growth, it cannot afford to worry about housing speculation just yet.