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Amid a sustaining decrease in the value of the housing market, several Chinese cities have abolished household registration restrictions on property investment. Chengdu, the hub of development in southwest China, has notably proposed and then revoked its offer of a 3-percent housing loan subsidy for first-time buyers. Amid fears of building modern "ghost towns," Chinese municipalities began to enact restrictions on property investment from as early as 2009.
The property market is considered one of the most profitable and stable investments, thus this policy was difficult for many hopeful homebuyers. However, Chinese policymakers are now afraid of the repercussions of the rapid decrease in activity in China's property development sector. The slump in the property market has been strong enough to bring the China Services Index to a record low. Some analysts suggest that this may indicate that the government's stimulus measures are failing to gain traction outside of manufacturing.
Meeting analyst expectations, China's consumer price index, a main indicator of inflation, increased by 2.3 percent year on year (yoy) in July. This increase, in part due to the increase in food prices, falls a comfortable distance from the government's targeted limit on inflation for the year - 3.5 percent. China's manufacturing purchasing managers' index, an indicator of the development of the manufacturing sector, increased to an 18-month high of 51.7, the fastest expansion in more than two years, which likely suggests that the government's stimulus plan is, indeed, making an impact on the manufacturing sector.
Export and retail figures steady
Trade and retail figures provide valuable insight into the status of the transition of China's economy from an export-oriented manufacturer to a service-oriented economy, whose growth is based on domestic consumption. Growth in exports from China has continued to increase, coming in at 14.5-percent yoy in July. Import growth, on the other hand, has been lackluster in recent months, dropping by 1.6 percent yoy in July. Retail growth has continued its steady development, falling slightly under estimates of 12.4 percent at 12.2-percent yoy growth in July.
Beijing needs to rebalance its economy away from excessive reliance on investment towards a more domestic consumption driven growth model. Beijing will only be able to accomplish this feat through targeted market-oriented reforms such as deepening reforms in the land, labour and financial markets. In the meantime, the vested interests of China's powerful SOEs, who have long enjoyed preferential government policies in an effort to breed global champions, will remain a major hurdle in pushing long-awaited reforms.
China is still on track to become the world's largest economy sometime during the new leadership's 10-year tenure. If China's policymakers fail to push much-needed reforms, foreign investors will look to other markets and marginalised sections of the population will grow even more restless. However, if China can stay on course - while battling increasingly visible signs of strain - it will herald yet another chapter in China's unrivalled growth story.
Click here to download the October 2012 edition
In the October 2012 edition of The China Analyst, we gauge China's progress in implementing these market-oriented reforms and highlight the opportunities that companies need to be aware of as China enters a new, more sustainable growth phase.
This edition includes the following lead articles:
- China's Economy: Heading for a Firm Landing?
- China's SOEs: Stalled Reforms or Agents of Change?
- FOCAC 2012: Sino-African Partnership Gains Momentum
A new Commodities section focusing on China's role in global commodities trade is included to complement other regular sections such as: Procurement, where we take a closer look into China's rising labour costs; Strategy, where we explore China's role in Africa's development as an investor and major trading partner; Investment, where we analyse China's overseas resource investments; BRIICS, a macro economic comparison of the world's six major emerging economies; and four Regional Focus sections with analyses of the latest China-related trade and investment activities in Africa, Australia, Latin America and Russia.
The China Analyst is published by The Beijing Axis, a China-focused international advisory and procurement firm.
To view the current and past editions of The China Analyst online, please visit our website.