Hui Tai (許長泰) is experiencing deja vu.
China’s surge in home prices reminds JPMorgan Asset Management’s chief Asia market strategist of last year’s stock-market mania. Spiraling leverage and implicit state support are among the common denominators, he said.
Shanghai property values jumped 31 percent in August from a year earlier, the latest data showed. Last year, a 60 percent rally in the city’s equities through June 12 was followed by a US$5 trillion rout.
Deutsche Bank Group AG warned last month that China’s housing market is in a bubble, while Goldman Sachs Group AG said this week it sees growing risks across the real-estate industry.
Home prices started to take off last year in the wake of the stock-market crash after local governments eased curbs on property purchases. In recent days, cities, including Shenzhen, have started reimposing the restrictions.
“It’s similar to the equity market where if you let things loose, it just runs like a stallion, and then you have to really rein it back, then it’s like an ice bucket challenge,” Hui said. “So you go through this extreme heat and cold. That’s not particularly good for the economy because then you’re going through very aggressive investment cycles.”
At stake is the government’s ability to channel funds trapped by capital controls into investments that can boost the economy without creating asset bubbles.
Speculative buying of commodity futures earlier this year fueled a boom that quickly unraveled, while a botched intervention to halt plummeting equities dented the credibility of policymakers and roiled global markets.
Just as the surge in stocks in the first half of last year enervated financial services and provided a fillip to an ailing economy, rampant demand for property is boosting the outlook for commodities and lifting the earnings outlook for construction-related firms.
Profits of industrial companies jumped the most in three years in August, while factory output, investment and retail sales also beat analysts’ estimates.
Medium and long-term new loans, mostly mortgages, totaled 529 billion yuan (US$79 billion) in August, while aggregate financing jumped to 1.47 trillion yuan, helping fuel a 39 percent jump in property sales by value in the first eight months.
Meanwhile, private investment in fixed assets stalled at 2.1 percent for a second straight month in August, matching a record low.
Just like last year’s equity boom, China is using credit growth to boost the economy, Deutsche Bank chief China economist Zhang Zhiwei (張智威) wrote in a report on Wednesday last week.
However, there are signs policymakers are acting to restrain growth in debt.
The People’s Bank of China has kept its benchmark lending and deposit rates on hold for nearly a year and banks’ reserve ratios remain unchanged since February, failing to deliver the additional cuts private economists had forecast in earlier surveys.
The central bank has also used longer-term tenors in the open market to drive up funding costs in a bid to rein in leverage.
Still, any winding down of debt brings its own risks.
“We saw the stock market tumble in 2015 from June throughout the second half, triggered by the unwinding of leverage after margin lending reached record highs,” JPMorgan Chase & Co vice chairman of Asia-Pacific Jing Ulrich (李晶) said. “Today, an alarming sign is that leverage is also building in the property market.”
While analysts are not predicting home prices will collapse in the manner of the stock market, last year’s experience shows the risk of allowing a leverage-fueled boom to spiral out of control.
Hui said China appears to be repeating the mistakes of the past.
“The government seems to just go through wild swings when it comes to control and let things loose because they want growth coming back,” he said.
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