China's State Council Signals Potential New Housing Measures Amid Market Stabilization Efforts

Key Takeaway

• China's State Council signals potential new housing measures, urging an "open mind" to reduce housing inventory and stabilize the market.
• Despite policy efforts, Chinese developer shares fell up to 2.7%, with Dexin China Holdings facing liquidation amid ongoing sector weaknesses.
• USD/CNH poised for higher trading range due to event risks; PBOC expected to maintain easy monetary policy amid diverging offshore forwards.

Policy Signals from Beijing

China's State Council has urged officials to maintain an "open mind" regarding policies aimed at reducing housing inventory, signaling potential new measures and additional funding to stabilize the market. This directive was posted on the government’s website late Friday, just before a three-day public holiday. The statement emphasized the need to "steadily and concretely push forward the work of digesting and revitalizing existing homes and land with an open mind and broadened thinking."

Last month, Beijing introduced a real estate rescue package to address significant economic concerns, including relaxed mortgage rules and encouragement for local governments to purchase unsold homes. However, skepticism remains among investors and analysts about the sufficiency of these measures. The central bank has allocated 300 billion yuan ($41.4 billion) for these purchases, but trial programs in several cities have shown slow progress.

Goldman Sachs Group Inc. economist Hui Shan noted, "Our interpretation is that the impact of the latest round of easing thus far may have been more muted than policymakers had expected." Shan added, "If the property market still does not show more signs of improvements in the coming months, we think policymakers will likely introduce more funding and new measures to destock inventories and stabilize prices."

JPMorgan Chase & Co. analyst Karl Chan suggested that the State Council's call for open minds could lead local governments to implement more creative and bold supportive measures. Chan expects stronger actions, such as further easing of home purchase restrictions and relaxation of price caps in central areas of China's largest and most expensive cities, if sales in June and July do not meet expectations.

Market Reactions

Despite these policy signals, investor confidence remains low. Shares of Chinese developers fell by as much as 2.7% on Tuesday, continuing their decline into a bear market. Dexin China Holdings Co. became the latest developer to face financial difficulties, being ordered into liquidation after losing a court case in Hong Kong.

The Shanghai Composite Index is nearing a critical test of the 3,000 level, which it held on three occasions in March and April. A definitive breach could lead to a significant unwinding of gains made in February. The market's sentiment is further dampened by ongoing property sector weaknesses, disappointment over Apple's recent AI event, and concerns about potential EU tariffs on Chinese electric vehicles (EVs). Additionally, the holiday period did not deliver the expected tourism boost, adding to the market's woes.

Garfield Reynolds from Bloomberg noted, "The death by a thousand cuts that Chinese equities are facing shows investors are going to need some fresh, large doses of medicine from the authorities to sustain this year’s fading rally."

Currency Market Dynamics

The USD/CNH (U.S. Dollar/Chinese Yuan) currency pair is poised to move into a higher trading range, influenced by upcoming event risks such as the Federal Reserve meeting and inflation data from both China and the U.S. Although the People's Bank of China (PBOC) is expected to continue restricting yuan movement via daily fixing, offshore forwards indicate a more pessimistic outlook for the renminbi.

There is a divergence in the offshore forwards curve, with one-year contracts moving in the opposite direction of one-month contracts, typically signaling a negative stance on the yuan. The spot USD/CNH is also close to the top of its price range since March. China's inflation data this week is likely to strengthen the case for the PBOC to maintain an easy monetary policy stance.

The onshore-offshore spread has been widening but remains far from extreme levels that would deter yuan bears. This situation is likely to encourage USD buyers, especially if the euro faces additional pressure amid speculation surrounding the upcoming French elections. Should the USD/CNH reach a 7.28 handle this week, it could trigger the start of a higher trading range.

Street Views

• Hui Shan, Goldman Sachs Group Inc. (Neutral on China's property market):

  "Our interpretation is that the impact of the latest round of easing thus far may have been more muted than policymakers had expected. If the property market still does not show more signs of improvements in the coming months, we think policymakers will likely introduce more funding and new measures to destock inventories and stabilize prices."

• Karl Chan, JPMorgan Chase & Co. (Cautiously Optimistic on China's housing policies):

  "The State Council’s reference to the need for open minds and broadened thinking could encourage local governments to be more creative and bold in rolling out supportive measures."