How will China's property boom affect macro policies?

Property prices soared 28% in prime cities.

Lately, fast-rising property prices have been generating many headlines. Property prices rose 28% y-o-y in the four Tier 1 cities (Beijing, Shanghai, Guangzhou and Shenzhen) in August, continuing a year of double-digit gains‎ and‎ fuelling‎ talks‎of ‎a ‎‘property‎price bubble’. But the national picture is far more uneven, or even divergent, said HSBC.

The research firm suggests that significant divergence in the property market means macro-prudential measures tailored to local conditions
are better solutions.

Here's more from HSBC:

Outside of Tier 1 and Tier 2 cities (the top 35 cities account for only a fifth of the national market), prices are at best flat amidst high levels of inventory. Outside of the top four cities, average levels of affordability in urban area are reasonable and still better compared with a decade ago. And, while mortgage loans have grown faster in 2016, overall household debt levels are still low. Therefore, selective macro-prudential policies, appropriate for local conditions,vare better solutions than broad-based monetary tightening.

Meanwhile, the real economy still faces strong headwinds, such as slowing privatevinvestment and a prolonged weakness in exports. This calls for continued policy easing.

The focus of policy easing continues to shift from monetary to fiscal. We have recentlyvpared back our monetary easing calls for 2016 and 2017, while increasing our fiscal deficit assumptions.

Faster fiscal expansion is more effective at supporting growth and will also help to address concerns over‎ ‘asset ‎price‎ bubbles’ by channelling more liquidity into the real economy.

However, fiscal expansion need not entail monetary tightening. In fact, successful fiscal expansion requires some degree of monetary accommodation. This is because the infrastructure-centric nature of fiscal expansion requires support from market liquidity, policy banks and commercial bank lending.

China Development Bank (CDB) alone has issued (so far this year) over RMB1.4trn worth of policy bank bonds, an estimated RMB1trn of Special Financial Bonds, and will likely provide over RMB2trn of loans in 2016. Some of these are used as seed capital, which means the rest of the funding will come from commercial banks. Private Public Partnership (PPP) projects, of which RMB1trn are in progress, also count commercial bank lending as the main source of financing.

Our base line case for 2017 is for the general budget deficit target to be raised to 4% of GDP. However, unless the deficit target turns out to be significantly higher, monetary policy will likely need to remain accommodative throughout 2017 as well.

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