China's Economy Is Perking Up. Cheap Money Helped.

Despite the economic challenges faced by China, certain regions within the world's second-largest economy are exhibiting signs of progress. Furthermore, authorities in two major cities took swift action to attract additional potential homeowners and bring stability to the real estate markets. Economists emphasize that further measures are required to address the issues within the Chinese economy.

The information gathered by China Beige Book, a reputable research organization, from their extensive surveys of 1,300 companies carried out between August 17th and August 25th, indicated some positive developments. Despite the ongoing conditions, Chinese citizens are continuing to allocate funds towards recreational activities and travel. Additionally, indications demonstrate that the decline in retail spending witnessed in July may be heading towards a reversal.

Possibly promising: As the Chinese government reduced borrowing costs and witnessed job growth in various industries except for real estate, it resulted in an increased number of companies obtaining loans, as reported by China Beige Book.

China's economic downturn is primarily due to the troubled property market, and the latest data does not indicate any positive developments. Home sales experienced a significant decline, while the commercial real estate industry continued to struggle for the second consecutive month.

Chinese policymakers have intensified their initiatives to attract additional domestic buyers. Guangzhou and Shenzhen have eased regulations in order to enable more individuals interested in purchasing a home to access favorable loans designed specifically for first-time buyers. This has ultimately resulted in a reduction of necessary down payments and mortgage rates.

In this change, prospective home purchasers in Guangzhou, for instance, would witness a reduction in their mortgage down payment rate from 40% to 30%, or even 70% previously. Additionally, mortgage interest rates will be decreased from 4.8% to 4.2%. According to a note from the Goldman Sachs Asia-Pacific economics team, this adjustment has the potential to uplift dwindling consumer trust.

The economists mention that other cities might adopt comparable strategies. Nevertheless, the economists at Goldman Sachs are maintaining their belief in an "L-shaped" rebound in the housing market due to the ongoing fragility observed in lower-tier cities and within the private developers sector.

According to Shehzad Qazi, the managing director at China Beige Book, the actions taken by the government have already caused the average mortgage rates to decline when compared to the previous years. However, this has not resulted in consistent growth in the sales of homes. One of the reasons for this is that people are still uncertain about whether housing prices have reached their lowest point.

Confidence might decline even more if local policymakers fail to act swiftly or adequately. In the event that the proposed measures for easing restrictions are delayed beyond expectations, their impact may be greatly diminished. This could result in households postponing or even scrapping their plans to buy homes, developers facing tighter financing conditions, and a renewed blow to market confidence, as stated by economists at Goldman Sachs.

While economists anticipate additional actions from monetary, fiscal, and housing sectors to stimulate the economy, they predict that such efforts will be gradual and fragmented. This may not align with investors' preferences, as they desire more decisive and comprehensive measures.

Contact Reshma Kapadia via email at [email protected].