From "Property Radar China: Medicine not strong enough" by David Ng, Jeffrey Gao and Raymond Liu, RBS analysts, September 10
A vibrant land market is crucial to the funding of local governments and has a direct impact on their ability to finance infrastructure investment, support GDP growth and provide collateral against bank borrowings…One of the arguments against cooling the property market is an even stronger need to sustain GDP growth. Fixed asset investment equaled 66% of GDP during 2009…The most immediate impact is on land sales by local governments, which normally account for over 30% of their revenue. During 2009, land sales accounted for 202%, 46% and 41% of revenue to Hangzhou, Beijing and Shanghai, respectively…Land sales have been surprisingly robust and sales look even more spectacular when we consider that 2009 was a record year, with land sales up 170% versus 2008 for the top 20 cities. Despite the high base in the second half of 2009, land sales for the remaining four months only need to be maintained at the same speed as the first eight months in order to achieve a 5% annual growth versus 2009… High land prices offset the effects of cooling measures as they convince buyers that, despite a temporary slowdown in price appreciation, long-term prospects remain bullish. We see the increasing number of record-breaking deals as a reason for authorities to step up cooling efforts.
From "Property construction and imports hold up" by Tao Wang, UBS economist, September 10
Markets have been either worried about China’s economy heading toward a hard landing, or that a strong rebound in property sales and prices might prompt new property tightening measures. Investors can breathe a sigh of relief now…housing starts and property construction held up well in August, as did exports. At the same time, property sales recovered from the lows in the past few months but prices stayed flat…The weakening that we were expecting in housing starts and construction has not yet materialized. If this trend holds up, we may need to adjust our property construction and commodity demand for the rest of the year upward. Both housing starts and ongoing construction increased month-on-month, while land sales rose strongly. As a result, our UBS property construction index edged up slightly to 22% year-on-year, showing amazing stability four months after the property tightening measures have been put in place. Property data – with sales recovering somewhat, construction activity staying strong, and prices looking stable – should be acceptable to the government and the market, and we think the chance of additional government tightening on the property sector is small. Looking ahead, we believe that sustaining the current tightening measures and increased supply in the next few months should help to keep volume robust and prices stable.
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