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Is Credit-Fueled Property Growth Sustainable in China?

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China’s property sector

China’s property sector remains critical for iron ore demand. Investors in iron ore companies such as Rio Tinto (RIO), BHP Billiton (BHP) (BBL), Vale (VALE), and Cliffs Natural Resources (CLF) should keep an eye on developments in China’s property sector. Cliffs forms 3.5% of the SPDR S&P Metals and Mining ETF (XME).

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China’s property sector

China’s government has taken a number of steps to kick-start the country’s property sector investment in order to support other sectors. These steps include cutting taxes on home transactions, easing mortgage down payment requirements, and cutting interest rates. According to the latest property sector figures, these efforts have started showing results.

The amount of floor space sold has shown a rapid increase in the last two months. The volumes in April increased by 44.1% YoY (year-over-year) to 117 million square meters. In April, home prices in 100 cities rose by 9% YoY.

As you can see in the above graph, China’s real estate climate index inched higher in March as well as April. The index measures the country’s aggregate business activity for land and real estate.

Can the property sector sustain?

The property sector has been improving steadily in the last few months. But the improvement is mainly the result of supportive measures from the government. Underlying demand has yet to pick up to support the property sector.

This lack of underlying demand worries analysts concerning the longevity of this investment growth and the rally in home prices. Home prices are expected to come under pressure from large inventories in Tier 3 and Tier 4 cities. Goldman Sachs (GS) warns that while the property sector is on a roll, it might be time to pull back due to concerns of overheating. Unsold inventory remains high, and government policy might become less supportive going forward.

The recent spur in the Chinese property sector is also due to cheap financing available. In the next part of this series, we’ll look at this in greater detail.

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