For most of 2017, the global stock markets’ performances have been nothing short of spectacular. In mid-October, US stocks continued to surge after the Senate approved Trump’s budget giving rise to hopes that Trump’s tax reform bill may be passed this year. The Dow Jones Industrial Average went into record territory while hopes of an approved tax reform bill also lifted sentiments for global stocks.
On 18 October 2017, China’s central government convened its nineteenth National Congress. During the high-profile event, President Xi Jinping highlighted that China’s Gross Domestic Product has reached Rmb8 trillion, far surpassing that of Japan – the third largest economy in the world.
At this rate of growth, economists predict that the Chinese economy will surpass the US to become the world’s largest economy in a decade’s time. China’s rise to its current status power is a reminder of the “Chinese Dream” that Xi spoke of during his inauguration in 2012. Today, we are already seeing China’s wide influence on stock markets in the Asia Pacific region.
The national congress closed on 24 October 2017, with some of the new generation of Chinese Communist Party members stepping up to the apex of Chinese leadership while Xi is virtually guaranteed to continue as party chief for a second five-year term. As a result, the world is unlikely to see any major shift in policies in the short-term; at least not till the nineteenth plenary session next year.
But it is almost certain that reining in financial leverage will remain as one of the central government’s top priorities. Some analysts argue that debt levels will rise with the central bank’s recent move to slash the effective bank reserve ratio to 1.5 percent in 2018.
However, the argument is flawed because the central bank’s policy comes with the condition that commercial banks lend only to companies that invest in tangible assets and the real economy. Such loans cannot be used for speculation.
In slightly over a year’s time, Hong Kong’s Hang Seng index has risen 10,000 points to 28,000, breaking the high of 2015’s “Golden Rally”. Incidentally, China A-shares are nowhere near the record level of 2015 and even farther from the peak of 2007. Evidently, this reflects the significant progress made in China’s deleveraging campaign and hence do not expect China A-shares to run up in the near-term.
Apart from deleveraging, China will also stick to its stance of reducing overcapacity. Over the past year, commodity prices such as coal, steel, cement, copper and aluminium have risen substantially, reflecting the impact of China’s structural reform. However, given rising commodity prices, measures would have to stay in place to curtail excess investments into its commodities industry. As such, overcapacity challenges in China will not be eliminated in the short-term.
Recently, rumours surfaced that China’s new energy vehicle market is seeing some worrying signs of oversupply. In the past year, new energy vehicle sales volume has soared and could have indeed led to excessive production. Some further speculated that the Chinese government is encouraging corn-refining to fuel automobiles on the ground that it is both environmentally-friendly and is a solution to the oversupply situation of corn.
Many years back, similar market rumours surfaced, driving up the stock prices of refiners because the profit margins for refining corn are significantly higher. However, corn supply also quickly dissipated, bringing the speculation to a quick halt.
During the National Congress, Xi also reiterated that home ownerships are not meant for speculation. This notion was also brought up by Xi in Hong Kong, during the SAR Government Inauguration ceremony on 1 July 2017. In other words, the housing problem in both Mainland and Hong Kong is amongst the central government’s major concern as well.
In the last few years, the central government tried to curb soaring housing prices by depressing demand: The central government imposed restrictions on purchase, inventories and selling prices in the Mainland. Meanwhile, the SAR government has imposed special stamp duties, buyer stamp duties, double stamp duties and 15 percent uniform stamp duties in Hong Kong.
However, growing rural-to-urban migration in the Mainland and growing population in Hong Kong have impaired the effectiveness of the cooling measures. As a result, demand still outweighs supply and hence housing prices continued to climb albeit at a slower rate.
During the year, Hong Kong-listed stocks with real estate exposure in the Mainland have skyrocketed as they reported astounding profits and sales. Stocks with Hong Kong properties also posted impressive performance, although not as well as those with Mainland properties.
For most of the year, many Hong Kong property projects were sold out within a day of launch, leading to a year of excellent earnings for the developers. In the Mainland, giant property developers could sell as much as Rmb100 billion worth of properties in a year, given its population of 1.3 billion. But for Hong Kong, with just 7 million residents, it is already a feat for a developer to sell HK$20 billion worth of properties.
For Xi, the most direct method to put a lid on China’s property prices is simply by raising supply. In 2017, the dramatic increase in sales of properties amongst various mainland developers can be attributed to Xi’s intervention.
Five years ago, Singapore and Hong Kong imposed various stamp duties to depress property prices simultaneously. While Singapore’s property prices declined for the past three years before stabilising recently, Hong Kong property prices have risen 60 percent over the past five years.
What differs is Singapore’s ability to increase supply of housing properties. In addition, falling prices also have the secondary effect of curbing investors’ appetite. Eventually, developers also slowed the launch of new projects.
The reason why Mainland property developers posted stellar earnings this year is because the central government increased land supply for development three years ago. With Xi resolved to tackle China’s housing bubble, it is likely that land supply is going to increase significantly again.