China Stocks Surge, But Analysts See Govt Going for Stability

The big China business news last week was the surge in share values for real estate developers, as investors see signs that the country is starting to loosen its restrictions on the residential real estate market. However, a recent survey of China market analysts indicate that such optimism may be unwarranted as government leaders are seen preferring social stability over economic growth in 2012.

After Shanghai and some other cities in China tweaked their real estate regulations to try to revive sagging housing markets, and the country’s central bank lowered reserve ratios, stock exchanges in Asia reacted enthusiastically last week with China property developers leading share surges in Shanghai, Shenzhen and Hong Kong.

An index tracking real estate stocks on the Shanghai Composite leapt 3.9 percent on Friday, on top of the 9.3 percent gain that investors had picked up earlier in the week. The rise in the index was the most since October.

Poly Real Estate, China’s second-largest developer was up 3.5 percent to RMB 11.70 on Friday, while China Vanke (the nation’s largest developer) added 3.9 percent to RMB 8.51.

Despite all of this investors enthusiasm, however, a recent survey of analysts by Bloomberg News predicts that the government’s emphasis this year will be on curbing pollution, inequality and the risk of financial instability rather than enjoying the benefits of faster economic growth.

According to 8 out of 15 economists responding to the survey, Premier Wen Jiabao is expected to target GDP expansion of less than 8 percent in his report to the National People’s Congress in Beijing on March 5. (This report is the equivalent of the U.S. President’s State of the Union address).

The respondent’s median estimate of 7.5 percent GDP growth compares with China’s 8 percent goal maintained from 2005 to 2011, even amid the 2008-09 world recession. One of Bloomberg’s respondents spoke in detail about what he expects the government’s economic goals to be this year.

“A lower target should be seen more as a signal that there’s more emphasis on economic transformation and quality of growth over speed rather than a real goal,” said Ding Shuang, a Hong Kong-based economist with Citigroup Inc., who previously worked for the International Monetary Fund and China’s central bank. “Slower growth could provide more room to proceed with reforms that are required for rebalancing.”

The emphasis on stability over economic growth comes as China’s Communist Party prepares for President Hu Jintao and Wen to hand over to a new generation of leaders at the party meetings later this year.

In the context of this change in administrations, many observers see the government aiming to limit discontent over home costs, land seizures and the gap between rich and poor, as well as to quiet demonstrations and “mass incidents” over environmental disasters.

So investors are recommended to keep an eye on their real estate stocks between now and March 5th, as the current loosening of restrictions may not yet lead to a full reversal of government real estate policy.