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China Equities Eye Housing Boost Amid Mixed Economic Signals

China's mixed economic data prompts government real estate support, with a 6.3% industrial output rise and a 9.8% property investment drop.

By Athena Xu

5/16, 23:12 EDT

Key Takeaway

  • China's economic data shows mixed signals with industrial output up 6.3% but retail sales growth weak at 2.3%, indicating consumer demand issues.
  • Government considers buying unsold homes to support the real estate sector, sparking a property subindex rise of 18%.
  • Financial strategies include a potential reserve ratio cut and enhancing Hong Kong's market, amidst concerns over local government debt reaching 56% of GDP.

Mixed Economic Signals

China's recent economic data presents a complex picture, with indicators pointing in different directions. While industrial output for January to April showed a stronger-than-expected increase of 6.3% year-on-year, surpassing estimates of 5.9%, retail sales growth in April was weaker at 2.3% year-on-year, below the expected 3.7%. This discrepancy highlights the ongoing weakness in consumer demand, despite a positive shift in the jobless rate to 5.0% at the end of April, suggesting some income stability. Property development investment continued its decline, falling 9.8% year-on-year, reflecting persistent challenges in the real estate sector.

Government Measures to Bolster Real Estate

In response to the real estate downturn, the Chinese government is considering ambitious measures to support the sector. One proposed initiative involves local governments purchasing unsold homes to alleviate the housing inventory glut, potentially transforming these properties into affordable housing. This plan follows a series of less impactful measures and aims to address the significant drop in home sales, which plummeted about 47% in the first four months of the year. The Hong Kong property subindex has seen an approximate 18% increase over the past month, buoyed by investor optimism over these government interventions and successful bond interest payments by developer Country Garden Holdings Co.

Financial and Policy Implications

The financial implications of the government's proposal to buy back unsold homes are significant, with estimates suggesting that at least 1 trillion yuan ($139 billion) may be required. This initiative raises concerns about the financial strain on local governments and banks, given local government debt levels have soared to 56% of GDP. In addition to addressing the property market slump, China is adjusting its monetary policy and financial market strategies. The People's Bank of China is expected to cut the required reserve ratio next month, and measures to enhance Hong Kong's financial market are being implemented, including a dividend tax exemption for individual investors and the expansion of the Stock Connect program.