Do China’s Homebuyers Know Something Its Economists Don’t?

The two big economic stories in China this week were the rebound in housing sales, and the rate cut from the central bank. Two important groups of economic actors sending out two very different sets of signals about the economy.

In a major sign of faith in the country’s housing sector, several real estate research organisations have been reporting surges in housing prices of as much as 20 to 30 percent year on year, along with rising transaction volumes.  While sales are still not as strong as they were in 2009 or 2010, bear in mind that average down payment levels have jumped from 20 percent to more than 40 percent since that time.

According to Soufun, weekly sales volume in the China’s top 40 cities rebounded significantly last week, surpassing the previous peak in October 2010. The same study showed that the average price of housing purchased in China during June rose 0.05% to 8,688 yuan($1,368)

At the same time that China’s home buyers were betting big, however, the economists running its central bank were seeing signs of a slowdown.

Thursday, in an unexpected move to shore up what it sees as a sagging economy, the People’s Bank of China (PBOC) cut regulated bank lending rates by nearly a third of a percentage point, and made a rule change that could further reduce borrowing rates for companies with good credit by an additional three-fifths of a percentage point.

This two-fisted move to stimulate China’s economy comes only one month after a previous rate reduction and rule change by the central bank and follows a string of disappointing economic data from China’s manufacturing and service sectors that indicated a sharp slowdown in the economy.

Although China has not yet released its economic data for the first half of the year, it is safe to guess that the people running the central bank get a sneak peak at these figures, and this stimulus move would indicate that they didn’t like what they saw.

At the same time that home sales are surging, SPG Land became the first listed property developer in China to warn that it would suffer a loss for the first half of 2012. In the manufacturing sector, which still is the dominant force in China’s economic, the official Purchasing Managers’ Index hit a seven-month low during June.

Despite this overall economic gloom, however, China’s real estate buyers have not lost their enthusiasm for buying houses. In a note to clients last week, Jinsong Du, a Hong Kong-based property analyst at Credit Suisse Group AG, predicted that demand for residential real estate will continue to increase in the near term and anticipated that this would drive up prices “meaningfully in the next few months.”

The more interesting part of Du’s prediction, however, was that, contrary to the rapid lifting of real estate restrictions foreseen by many developers, the rebound in prices “may trigger the government to implement new measures to curb housing prices around late September or early October, depending on the economy status.”

In another sign of the basic differences in how the government and the public see the near-term future of the housing market, economist Yi Xianrong of the government-affiliated Chinese Academy of Social Sciences, recently commented in the official China Daily, “The current rise in house prices has, to a large extent, been a result of misinterpretation of the government’s policies to stimulate the economy, an increase in real-estate speculation, and excessive concerns among ordinary home buyers that prices will continue to rise.”

So even though prices are continuing to go up, it is clear that this is not what the central government wants.  And in this country, the central government usually gets what it wants.