EcoView Spot Analysis

The decline in Chinese housing prices accelerated in April as government continued to signal that it is not ready to soften its campaign to clamp down on the housing market despite broader economic weakness. Prices in 46 of the 70 cities surveyed by the NBS fell in April on a year-on-year basis. Prices were down in 43 of the 70 cities on a month-on-month basis, slighty better than in March, when they fell in 46 cities. Among the biggest cities, signs of deterioration were much clearer, with house price growth in Beijing declining 1.0% y/y, worse than the falls of 0.8% y/y in March and 0.4% in February. In Shanghai, prices fell 1.3% y/y, the steepest monthly drop so far following March's -0.8% and -0.4% y/y in February.

In a segregated analysis the drop in house prices is a healthy development due to an overheated housing market. In the context of a cooling world economy, a deeping debt crises in the eurozone and increasing economic risks in South America the figures add fuel to the flames.

The HSBC PMI gives a first indication for the economic development in the second quarter. Indeed, the index improved but it remained below the expansion level of 50. The HSBC PMI reflects the situation in China better than the official PMI does.

While large entprises in China benefits from loans given by the government, the small and medium size enteprises, which are focussed by the HSBC PMI, are more exposed to real conditions. Chinese banks are pressured by falling house prices and rising bad loans.

A restrictive loan supply is the consequence, which is a burden for small companies. The domestic and foreign demand could improve somewhat but it is still far away from levels which could indicate a dynamic economic situation. Growth in the second quarter will be disappointing again.

China: HSBC PMI (MP3, 1149 KB)

The consensus forecast expected a plus of 8.4%. VP Bank's expectations got confirmed: The consensus forecast was too optimistic. The GDP growth was the weakest since the 2nd quarter 2009. The growth outlook for the upcoming quarters remains weak. Investments are loosing its dynamic. Investment growth is the weakest since ten years, as published in today’s data.

Furthermore net exports will not add growth impulses in the quarters ahead. Easing of reserve ratios and infrastructure projects undertaken by the government are able to lift growth rates in the second half of 2012. Up to this time China has to get used to weaker growth rates.

The inflation rate fell to a 20 months low in February. The decline was stronger than expected. Behind the fall can been seen the restrictive monetary policy as well as base effects. The People Bank of China gets a green light for lowering reserve rations further. Also China`s administration is getting support from the fall in inflation.

The National People`s Congress is looking for a stronger domestic economy. This is not working without a stronger credit supply. Therefore, the CPI figure is a straight line for the central bank: A further lowering of reserve rations will follow.