China is expanding at its slowest pace since the early 1990s. The world’s second-largest economy saw GDP growth slow from 6.2% y-o-y in 2Q19 to 6.0% in 3Q19, amidst a slowdown in domestic demand and the ongoing trade tensions with the US.

In previous economic cycles, China used the housing sector as a tool to heat or cool the economy. . Accounting for over 70% of the total real estate investment in China, the housing sector always received large capital inflows under stimulus policies. However, the Chinese regulators stated it will not use the housing market as “a short-term means of stimulating the economy”. But will the current easing cycle really be different from previous ones, and how?

Housing policy
Different from previous easing cycles, the central government has set a tone for this cycle by stating that “housing is for living, not for speculation”, sending a strong message to keep a tight policy stance on housing. Although local authorities have some room to fine-tune local regulations, we have not seen any major nationwide relaxation in key housing policies in terms of Home Purchase Restrictions, down payment requirement or mortgage policies. In addition, the shantytown renovation scheme, which helped boost home sales and prices in lower tier cities and played a key role in reviving economic growth since 2015, has been put on hold since late 2018. More recently in 2019, regulators has tightened developers’ financing channels to cool land sales market and manage market expectations.

Monetary policy
In the 2014-15 easing cycle, the People’s Bank of China (PBoC) introduced five cuts to bank’s Required Reserve Ratio (RRR) and six cuts to benchmark interest rate. The rate cuts not only helped to lower the borrowing cost to the real economy, but also boosted home sales due to increased mortgage availability and lower mortgage rates. However, in the current cycle, the PBoC unveiled reforms to turn the Loan Prime Rate (LPR) into the new benchmark for lending, replacing the one-year benchmark lending rate. The one-year LPR began at 4.31% in July 2019 before declining to 4.25% in August and 4.20% in September, indicating a modest easing in the PBoC’s monetary stance aimed at stimulating the country’s slowing economy. Meanwhile the five-year LPR – a new reference point for pricing mortgages – was held unchanged at 4.85%, indicating the PBoC is reticent about easing lending conditions in particular for the property sector.

In addition, the central bank has been scaling back its money supply target since the massive RMB 4 trillion stimulus plan announced in 2008-09. Compared to a 29.6% y-o-y growth in November 2009, the M2 supply growth has stabilized at 8-8.5% y-o-y during 2018-19. The  stable M2 supply helps to prevent excessive capital inflows into the housing sector and enables stability in residential market sentiment.

In general, the government has made obvious its intention to refrain from over-stimulating the housing sector in the current easing cycle. China’s housing market has entered a new phase defined by slower growth. Further down the road, the Chinese government has acknowledged the need for China to embrace a new growth model that relies less on housing investment, and more on private consumption, services, and technology innovation.

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