News from China continues to confound policymakers. Financial conditions are deteriorating, as a result of attempts to restrain the credit boom. House price data this morning offer little hope of the longed-for moderation. Instead property market strength seems to be broadening, with 69 of the 70 surveyed cities showing price increases in May (compared with 68 in April).
|Source: National Bureau of Statistics|
House prices in major cities are growing in excess of 10% per annum and are both a cause and effect of the shortage of affordable housing in China. Their rise creates subtly inter-linked social and economic problems for the Chinese authorities. High inflation is a social issue but the impact it has on wage demands is hindering China’s economic prospects.
The narrowing of wage differentials between China and the US support the trend of onshoring by US companies. That’s just one of the factors which makes us positive on the US (see Industrial renaissance in the US). Rising wages also risk the loss of market share to Asian neighbours with lower-cost labour.
Given the country's closed capital account and history of negative real interest rates, wealthy Chinese have a natural propensity towards property investment as a home for savings. The weakness of equities as an asset class has only intensified this tendency. The Chinese authorities now have a real challenge on their hands in their attempts to rebalance the economy from investment to consumption. Efforts to burst the bubble rapidly would inevitably impact consumption as households would feel compelled to rebuild home equity. Further capital account liberalisation looks a long way off and so we expect policy to continue to restrain credit creation and, by implication, growth in China.