The People’s Bank of China announced on December 25th that it would raise interest rates for the second time in ten weeks as part of its ongoing efforts to suppress prices and control inflation.
This move by China’s central bank is the latest in a series of economic tighteting measures which have been implemented in response to inflation fears during 2010, and the action is aimed at least in part at the real estate sector. The rate hike raises the one-year benchmark lending rate by 25 basis points to 5.81 percent, and the benchmark deposit rate would also be increased by 25 basis points to 2.75 percent.
Move Was Signaled In Early December
The increase in rates was widely expected and had been predicted by members of China’s politburo on December 3rd of this year. Since then many stocks, particularly in the property sector had already shed value in anticipation of the rate hike.
The government had previously made explicit its readiness to implement further tightening measures in 2011 as it begins to focus more intently on controlling price increases and assuring affordable housing for the population.
An Ongoing Effort to Control Inflation
The government is reacting against what many consider an alarming round of inflation-related data during November and early December which included wage increases, ongoing credit expansion, and increased food and commodity prices.
Commenting on the fight against inflation in a radio address on December 26th, Prime Minister Wen Jiabao said:”We have raised reserve requirement ratio for six consecutive times and increased interest rates twice to absorb excess liquidity in the market to keep it at a reasonable level to support economic development,” Wen said in a state radio broadcast a day after the rate rise.
Despite these repeated rounds of tightening measures, the volume of real estate transactions as well as land costs, have started to rebound in recent weeks. It is this market rebound that is believed to have at least in part triggered this latest rate rise.
In the same radio broadcast Prime Minister Wen commented, “I believe property prices will return to reasonable levels through our efforts. I have the confidence.”
Tightening Measures Limited by Growth Prerogatives
Although the focus on fighting inflation is undeniable, the government’s moves have been balanced by its interest in sustaining high rates of economic growth. The new buzzword in government economic policy edicts is “prudent.
Despite the repeated rounds of tightening, these actions can be seen as merely countering the aggressive stimulus measures put into place during 2008, and the overall government approach for 2011 is still growth focused.
According to an advisor to the People’s Bank, new lending during 2011 is projected to increase by $1 trillion. This quota is seven per cent lower than the target for 2010, but is still the third largest year on year increase to date.
Expect Real Estate Prices to Continue Rising But at a Lower Rate
Given the market’s durability in the face of the repeated tightening measures, and ongoing economic growth property prices can be expected to continue to rise. To date, the government has been cautious in its approach and has relied on multiple rounds of gradual measures rather than risk shocking the market. In the absence of clear signs of inflation-related social unrest, we can expect this approach to continue.
As long as the economy continues to be handled gently investors should anticipate ongoing increases in real estate prices during 2011, although it’s likely that the rate of price increases and the volume of transactions will drop off from 2010 levels.
Best Gains in Emerging Cities and Agile Companies
Policies such as the proposed property tax are initially targetted at Shanghai and other leading cities, and lending policies have also been applied more strictly in these areas. Investors seeking continued high rates of return will need to look more carefully at China’s emerging cities where policy measures may initially have less of an impact.
For 2011 investors should also look for companies which have shown an ability to successfully anticipate and hedge against government tightening measures.
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