Looking up

From "China: Surpassing Expectations" by Liu Li-Gang, ANZ head of China economic research, in "ANZ Research Quarterly" September 17

As inflation picks up and policy rates remain at historical lows, the real interest rate, which has been negative for seven consecutive months, is likely to trigger asset inflation. The experience of 2007 and 2008 shows that a negative real interest rate encourages investors to move their bank deposits into the property market, which, at that time, resulted in a 10% jump in house prices. With CPI inflation at 3%, the real mortgage rate … has, since Q1 2009, declined in tandem with housing price surges … Looking ahead, as long as investment options remain limited in China and as the effects of the administrative tightening measures on the property market diminish and the negative real funding costs persist, property market speculation is expected to continue. Inflation could rise higher than market expectations. Although we estimate that CPI inflation will average close to the government’s full-year target, the balance of risks is on the upside due to a large money overhang and strong underlying demand. Food prices could surge because of the unprecedented floods in southern China … The recent price rise in rental property has also increased inflation pressures. In addition, inflation expectations continue rising, despite the PBoC draining a significant amount of liquidity from the banking system.

From "Guanxi" by Mark Matthews, Macquarie Equities Research strategist, September 3

We asked 1,000 citizens in seven cities … their attitudes towards asset markets, inflation, government policy and the purchase of consumer goods. The results for the interviews of 13-24 Aug were interesting. The percentage of respondents who saw bank deposits as a good place to keep their money fell from 28% to 25%. Inflation expectations among our respondents ranged from 5-10% (the government is targeting 3%), so are not spiralling out of control. But those expectations are still much higher than the 12-month fixed deposit rate of 2.3%, suggesting asset prices are likely to be stronger rather than weaker in the coming months. Consumer confidence is at a 6-month high of 77 (as with most diffusion indexes, a reading over 50 is positive). For autos it’s 75, and for fridges and TVs, it’s 84. Sentiment toward property and stocks is recovering. The diffusion index for the question "Do you think now is a good time to buy a house?" rose above 50 for the first time in six months … [We are] no longer looking for policy loosening by year-end, the way [we were] in June, when the economy was slowing. With property transactions rising like this, loosening is no longer necessary. Property drives GDP growth (through construction, and the ancillary purchase of cars, appliances etc.). A big drop in volumes is bad for GDP. The government wants stability in prices, not weaker prices.