Bubble Trouble: What can policy easing achieve?

Property sector is the most important sector in China, considering its extensive linkage with other industries and importance in driving domestic growth and credit cycles. The biggest uncertainty for China's economy now and in 2015 is the nature and duration of the ongoing property downturn.

Following a sharp drop in the beginning of the year, property construction has shown signs of improvement in recent months as policies have been increasingly relaxed. Both have provided support for the economy and property related stocks, with the latter rallying by 17 percent from trough levels. We expect recent and further policy easing to help support property sales, starts, and construction in the run up to and around the "golden season" this fall.

However, near-term policy easing and improvement notwithstanding, we believe the property downturn reflects a structural turning point in the sector, and that policy easing can only help stabilize but not turn around the downshift. We expect commodity housing starts and construction to slow further by year end and into 2015, weighing more heavily on the economy.

In our earlier reports and forecasts, we had assumed that property policies would be increasingly relaxed and that construction and sales would improve in the summer/fall months. Even with additional policy easing including cuts in mortgage down payment requirement and rates, we see property sales and starts declining further in 2015 and GDP growth slowing to 6.8 percent.

Although the earlier than expected relaxation of property policies has boosted market sentiment, structural issues in the sector remain. As such, we think the re-rating will be capped by the higher leverage, falling margins, and high inventory levels of some property companies.

The article is co-authored with other UBS economists Harrison Hu, Eva Lee and Eugene Cheung. The views do not necessarily reflect those of China Daily.