More rainy days for Chinese developers despite stimulus

China’s property market has shown signs of warming up on expectations that Beijing will loosen monetary policies further, but a recent measure suggests the central government doesn’t want its generous stimulus to flow into the coffers of property developers.

Beijing will send inspection teams to 16 key provinces and cities by the end of this month to ensure real estate tightening policies are strictly enforced by local governments, according to a statement from the State Council.

The measure aims to “further ensure that the property regulation measures are implemented and speculative housing demand is curbed,” the statement said. The municipalities and provinces include Beijing, Tianjin, Shanghai, Chongqing, Hebei, Jiangsu, Zhejiang and Fujian.

The move “sends a strong signal to the market that the central government will not tolerate any policy fine-tuning by local governments and it also reiterates its strong determination to bring home prices back to a ‘reasonable level’,” said Katie Chan, a real estate analyst at Haitong Securities. “We maintain our view that the central government will hold tight on the tightening policies in 2012 and possibly in 2013.”

The announcement came out just one day after Nanjing’s announcement of enlarging the base of eligible first-home buyers and subsidising home purchases by “qualified professionals”. The recent interest rate cuts and rebound in property prices in key cities in June have raised concerns of another speculative boom.

Housing prices finally cooled down after almost two years of tightening policies. Home sales remained sluggish during the first five months of this year and picked up slightly last month. Analysts said it was mainly supported by aggressive price cuts to fulfil first-half sales targets.

Chinese Premier Wen Jiabao said in a recent trip to Jiangsu province that housing prices were still “beyond affordability”.

Chan said the sales of developers are likely to slow down in July and August due to the prevailing wait-and-see sentiment and the strengthened implementation of the current tightening policies. A drain on developers’ cashflow as a result of slower sales might prompt more price cuts starting from middle to late September. She reckoned that most developers have achieved 40% of their annual sales target for this year.

Economists warned the tightening policy will add risk to the already weakened economy. “If overleveraged property developers are forced to sell inventories, it could cause house prices to fall sharply, dousing sales and leaving the banking sector with a slew of bad loans,” said Alaistair Chan, an economist at Moody’s.

Chen Li, head of China equity strategy at UBS, said: “China is encouraging bank lending but most companies have little desire to borrow, the only interested borrowers are developers and local governments.”

Chen warned the real economy in China is much worse than official data suggest.

Apparently, Beijing is supportive of fixed-asset investment. The government of Changsha, a city in central China’s Hunan province, announced on Wednesday that it will launch 195 “big projects” involving a total investment of $130 billion. The move is expected to trigger a construction spree nationwide when other cities follows suit.

Whether the stimulus money will trickle into the more profitable property market, as it did in 2009, remains to be seen. Haitong’s Chan said that large and mid-sized developers may be able to achieve their annual sales targets providing they have new projects and offers to lure hesitant buyers. But for the small players, it will be very challenging.