As was widely expected, on Tuesday China’s central bank used the Lunar New Year holiday as an occasion to raise interest rates for the third time since October. 
The measure is the latest in a series of moves to tame inflation and cool down the residential property sector.
With financial markets on China’s mainland due to reopen on Wednesday after the weeklong holiday, the People’s Bank of China (PBOC) kept in step with other branches of the government in working to calm public fears of rising prices. After down payment requirements for mortgages were revised upwards on January 26th and property taxes introduced in Shanghai and Chongqing on January 27th, it is clear that markets can expect an ongoing series of efforts from the government to control price increases in the residential market in particular, and to tame inflation in general.
The PBOC announced that it had raised the one-year lending rate to 6.06 percent from 5.81 percent and the deposit rate to 3 percent from 2.75 percent. Hong Kong’s Hang Seng index responded by sliding by 0.3 percent to 23,484.3 points.
In view of recent history, the timing of this move came as no surprise, lending policies for China’s banks have been tightened near the Chinese New Year holiday five times in the last six years, either by raising reserve ratio requirements or by raising interest rates. However, this year’s conditions have brought a much higher frequency to these market controls.
Despite the ongoing recent measures by the government, China’s banks have continued to add liquidity to the market. In the first week of January, some RMB 500 billion in new loans were made, showing again the resiliency of investor enthusiasm which allowed the market to absorb repeated tightening measures over the last 12 months.
Prices to Level Off
While residential real estate prices have yet to go down in response to any of the government’s efforts to date, the increasing number of measures being employed can be expected to reduce investor confidence in the near term. The primary consequence of this will most likely be a rapid decrease in the number of new transactions taking place.
Given the durability of investor demand for residential real estate through the many moves to reduce liquidity and slow down price increases, if there is any dip in prices resulting from this latest round of measures, it can be expected to be minor and short-lived.
Over the course of the year, values can be expected to increase slightly or remain flat, with any near terms decreases that might occur being compensated for later in the year once the market has had an opportunity to adjust to the new financial environment.
( Originally prepared by the author for Colliers Research – East China)
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