The results of this two-tier system have been meagre so far. The frenzy in the biggest cities stems from the central bank’s steady loosening of monetary policy over the past 18 months. Although warranted from an economic perspective, it was inevitable that low interest rates would drive asset prices higher. Initially, much of the credit pumped out by banks ended up in the stockmarket, but following its crash last summer, property beckoned as one of the few decent investment options in China (capital controls, which have been further tightened recently, make it hard for Chinese savers to invest their money abroad).
For speculators looking at property, the excess supply in smaller cities was all too evident, so they turned instead to the megalopolises. Du Jinsong of Credit Suisse describes it as a form of groupthink. “Everybody—investors, developers, policymakers and bankers—thinks that first-tier cities are safe,” he says.
Even as the government tries to restrain the excesses, however, it does not want to snuff out the rally in the big cities altogether, for they tend to influence sentiment elsewhere. There are signs that this is beginning to happen. Housing prices started rising month on month in the biggest cities a year ago. In midsized cities (in China, those with populations of 5m-10m), prices have been rising for the past four months. In smaller cities (mere hamlets of 1m-5m), gains have been evident only for the past two months (see chart).
If this upturn lasts, some investors reckon it will spur construction. Commodities used to build apartment blocks, such as iron (girders) and copper (wires), have recovered slightly from their recent swoon, partly in the hope that China’s property market is also stirring (see article). Indeed, a series of mini-cycles in the Chinese housing sector over the past decade followed this sort of pattern: rising housing sales led to new building starts, which in turn pushed commodity prices higher.
Figures from the China Index Academy, a data provider, show that the stock of unsold homes has decreased recently, from nearly 30 months’ worth of sales early last year to 15 now. “A housing market with rising volume and prices clearly does not support the view that, on a macro level, China’s housing market is oversupplied,” notes Liang Hong of China International Capital Corp, an investment bank.
But there is a further vast increment of supply on the verge of coming to market, because developers slowed the pace of construction in recent years and in some cases halted it altogether.