Mixed picture seen for mainland's FAI policy
Updated: 2011-06-21 06:57
(HK Edition)
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Fixed asset investment (FAI) has been a pillar of strength behind China's robust economic growth during the past two decades. While the government has repeatedly emphasized that it wants consumption rather than FAI or exports as the key growth driver in future, investments remain a key component. I would like to take a close look into the matter and share some of my opinions.
Firstly, I have a mixed view on the big picture as some factors will support rapid investment growth while others will restrain it. As the first year of the 12th Five-Year Plan, 2011 is likely to see the kick-off of some new projects, and this will be an important factor underpinning investment growth. Besides, there will also be a need for follow-up investment arising from projects under construction as a result of the 4 trillion yuan stimulus package.
Meanwhile, declining export growth, rising costs and tightening monetary/bank lending policies will all dampen investment growth. Influenced by these factors, we expect overall FAI to slow slightly but remain above the 20 percent level. Due to the larger effects of the price factor, and smaller contribution of inventory, investment contribution to GDP growth will decrease.
To a certain extent, property investment is a vital portion in the nation's FAI. The latest round of property controls came to a climax after the Executive Meeting of the State Council held in January this year. Following the announcement of a much tighter property-related credit policy, property tax pilot programmes were launched in Shanghai and Chongqing late last year. Numerous other cities followed with rollouts of property-purchasing restriction policies.
Sales volume will be the first indicator to assess the efficacy of the controls, which is the regular pattern under China property industry cycle adjustments. The year-on-year growth of gross floor area sold should continue to decline, and in some months it may turn negative. With credit contracting and expected sales volume decreasing, the amount of purchased land will also decrease considerably. The decline of leading indicators suggests that the slowdown of commodity housing investment will be inevitable.
Due to the tightening of credit policies and slowdown of sales volume growth last year, property investment from most funding resources dropped dramatically. In the first quarter of 2011, domestic loan funds grew only 4.4 percent year-on-year (YoY), while individual housing mortgage funds declined 5.3 percent YoY.
Looking forward, a further drop in investment growth after this round of controls will dent property developers' cash flows and have a negative impact on private housing investment. Private home sales may drop 10 percent or so this year, while property-related loans growth is expected to be less than 10 percent. Therefore, the supporting property investment growth will possibly stay at only 5-10 percent.
In addition, this round of property controls focuses on the construction of social-security housing, which is the biggest difference from those in the past. The central government has adopted various measures, including the disclosure of specific targets, implementation of an inspection system and assurance of funding resources to meet the social housing construction targets.
The construction is not only an important driver for the long-term and healthy development of the real estate industry, but also an effective hedge against the potential slowdown in property investment. The central government plans to start 10 million social-security housing units this year, implying a huge jump of 72.4 percent over last year. With more clear targets, more strict executive inspections, the widening of funding channels such as financial subsidies, land-sale revenue, public housing fund lending pilot program and local funding platform loans, social security housing investment should see more rapid growth.
Assuming 10 million units will be started, translating into a total investment of around 1.4 trillion yuan. Corporate and individual funds used for shantytown renovation will amount to 300 billion yuan. The budget for social security housing at central and local government levels could reach 100 billion and 35 billion yuan respectively. In theory, funds from land sales should be around 100 billion yuan, and the public housing fund sused to make loans for social security housing construction is expected to reach 75 billion yuan.
The remaining financing gap will still be 240 billion yuan, and this shall be addressed through local financing platforms or other channels by policy banks and commercial banks. Given the support of social security housing investment, I estimate overall property investment growth this year of around 17 percent.
The author is Executive Director of BOCI Research Limited. The opinions expressed here are entirely his own and do not represent BOCI or any other affiliated companies within the group. Nothing in this article constitutes an investment recommendation.
(HK Edition 06/21/2011 page2)