Eco Analysis - Asia Round-up: Property market tightening in China sours the mood (K. Baader, W. Yao)

ECONOMICS
ECO ANALYSIS
March 4, 2013

Eco Analysis - Asia Round-up: Property market tightening in China sours the mood (K. Baader, W. Yao)

Asian stock markets started the week on a sour note, reacting to news of additional measures in mainland China to restrain real estate prices. This was arguably also the main factor driving down the Australian dollar, although the economic news reports this morning were also weak. The main exception to stock market weakness was Japan, where stocks are trading firmer despite a fractionally stronger yen. The relative stability of the yen is noteworthy, given that the proposed new BoJ governor, Mr Kuroda, reiterated in his confirmation hearing his strongly dovish bias, arguing for accelerated and broadened asset purchases. Lastly, an unexpectedly weak inflation reading in South Korea in our view boosted the chances of a rate cut by the Bank of Korea, a view that appears to be shared by the market, given the sharp decline in two-year government bond yields this morning.

■ Beijing intensifies the war against housing inflation

In order to tame fast-rising home prices, China's State Council released the second harshly worded statement in less than two weeks, which was a more detailed version of the five-point action plan announced on 20 February.

Besides threatening the market again with potential expansion of home purchase restrictions and property tax trials, the central government called for higher down payment ratios as well as higher mortgage rates on purchases of second homes in cities with “excessively fast” housing inflation. For reference, the minimum down payment ratio on second-home mortgages is already as high as 60% and the minimum interest rate is 1.1 times the benchmark lending rate - 6.55% for loans of 5 years or more at the moment.

Furthermore, the authorities require that for any second-hand property, of which the original purchase price can be verified, the 20% tax on capital gains should be levied on the sale, instead of the 1% tax on the gross selling price that is more widely adopted at the moment. This rule, if implemented strictly, will increase the effective tax on housing transactions significantly.

The statement was a surprise both in terms of timing and its hawkishness. However, it didn't specify when any of these measures will start to become effective. For that we will have to wait until after the National People's Congress meeting.

We think the immediate impact is going to be a surge in home sales in big cities, as people rush to close deals before the policy is put into place. Afterwards, property sales will probably drop substantially but property prices may not, as tighter implementation of the capital gain tax will serve to reduce the housing supply. Nonetheless, slower home sales are very likely to dent the growth momentum and overall liquidity conditions, as suggested by the housing downturn in early 2012.

■ Kuroda hearing points to big changes in Japan monetary policy

The government's candidate to be the new Bank of Japan governor, Haruhiko Kuroda, certainly fulfilled expectations that he will be far more radical than his predecessor. In his confirmation hearing in the Japanese parliament he criticised past BoJ policy as insufficient to overcome deflation, and that bolder easing could have avoided years of deflation. He went on to say that the “scale and scope” of the assets the Bank has purchased so far are not enough to meet the 2% inflation target, and that more easing is needed in both quality and quantity. While underlining that monetary policy is not decided by the BoJ governor alone, he indicated that he would favour extending the maturity of JGBs to be purchased beyond the current maximum of 3 years, and that he will consider starting open-ended asset buying sooner than the current plan (January 2014). He also stated that a wide variety of asset purchases should be considered, a hint that the BoJ may in future buy more risk assets - although Mr Kuroda is likely to face stiff resistance from the BoJ bureaucrats.

While his comments clearly suggest that he will pursue a much “bolder” monetary policy, he backed certain well-known BoJ positions, such as a rejection of monetisation of government debt and purchases of government bonds directly from the government (this was something that PM Abe had suggested during the election campaign last winter). He also stuck by the line that FX intervention is the finance ministry's responsibility, and that although monetary easing tends to weaken one's own exchange rate, the focus is not the yen's exchange rate but overcoming deflation. He also said that it would be difficult for the BoJ to buy foreign bonds, and stressed that it is important for Japan to have a medium-term fiscal consolidation plan.

■ South Korea inflation again below expectations - BoK rate cut looking more likely

Consumer prices in South Korea again undershot expectations. The CPI rose just 0.3% mom (median 0.5%, SG 0.4%), reducing the headline rate to 1.4% from 1.5%. The core measure (ex agricultural goods and oils) was also weak at 0.2% mom, but owing to a strong base effect the annual rate ticked up to 1.3% from 1.2%. It is worth noting that the slowdown in overall inflation occurred despite a bounce in food prices to 2.7% yoy from 2.0%yoy in January.

The continued undershooting of the Bank of Korea's inflation target of 2.5-3.5%, as well as recent activity indicators which suggested weakness in the domestic economy is giving us more confidence in our call that the BoK will ease policy in the near future, notwithstanding comments from the BoK governor that suggested otherwise.

■ Australian activity data disappointing

Building approvals defied expectations of a rise and declined again in January, although the impression of weakness was tempered by a large upward revision to December's data. Still, approvals declined 2.4% mom (median 2.8%, SG 3.0%) after a 1.7% drop in December (was -4.4%). There was some good news regarding private sector houses, approvals of which rose 3.2% mom after a three-month series of declines, amounting to a cumulative 4.6%. Moreover, the ABS's estimate of trend continues to recover.

In other news, company operating profits declined for the fifth straight quarter, easing by 1.0% and meeting the consensus forecast. The decline was led by manufacturing firms (-6.3% qoq), followed by mining companies (-3.7% qoq) and construction firms (-1.9%qoq). In contrast, despite sluggish sales, retailers recorded a 5.1% qoq increase. Lastly, inventories rose less than expected in Q4 by 0.2% qoq (median 0.6%).

Klaus BAADER

Wei YAO