China Focus: Policymakers walk a fine line with property market

China's warming property market has helped to put the broader economy on the right track in 2016, but in an industry fraught with uncertainties, policymakers have to walk a more cautious line between sustaining momentum and avoiding potential risks.

The housing market recovery gathered steam in several top-tier cities since the second half of 2015 following government support measures to reduce inventories, and the momentum is spreading to more regions.

Of 70 large and medium-sized cities surveyed in March, 62 saw new home prices increase month on month, up from 47 the previous month, data from the National Bureau of Statistics (NBS) showed on Monday.

In floor terms, property sales jumped 33.1 percent in the first three months, much higher than the 6.5-percent gain in 2015.

Boosted by the strong sales, property investment is picking up, fueling economic growth to 6.7 percent in the first quarter, accompanied by a string of encouraging indicators.

According to NBS spokesperson Sheng Laiyun, the warming housing market, which affected activity in sectors ranging from steel, cement, furniture to home appliances, contributed more GDP growth in the first quarter than it did a year earlier.

Given the huge overhang of unsold homes, which the NBS put at 735.2 million square meters by March, the question remains: Is the current momentum sustainable?

"We do not expect this rebound to last long as room for further easing in the sector seems limited, and pressure from severe oversupply has not abated," noted Japanese securities trader Nomura.

Authorities have cut interest rates, reduced downpayments for mortgages and removed existing home restrictions in nearly all but top tier cities.

For Minsheng Securities, the rebound in property investment brings with it bigger risks for the future, as it will only add to the number of unsold homes.

"The longer the rebound lasts, the bigger risks it will bring," it stressed.

Another key issue that will challenge policymakers is the growing divergence in the property market, with better economically positioned areas reporting drastic price rises, and less developed regions showing muted response.

In March, new home prices soared 62.5 percent year on year in the southern city of Shenzhen, the sharpest increase last month among all the major cities, followed by Shanghai, Nanjing and Beijing, where prices surged 30.5 percent, 17.8 percent and 17.6 percent year on year, respectively.

In smaller cities where oversupply is most prominent, prices remain subdued.

The contrasting picture has prompted local authorities to take different approaches: Shenzhen and Shanghai have tightened policies to curb speculative purchases and contain risks for a bubble, while third- and fourth-tiered cities are exploring new ways to spur sales.

For first- and second-tier cities, the buying mania over the past few months has eased demand, which will limit further price rises, while smaller cities still have a long way to go to resolve the supply glut, according to HSBC chief China economist Qu Hongbin.

"It is still quite unclear whether the warming-up is sustainable and whether property investment could continue to provide a solid support for the broader economy," he noted.

To address the uncertainties, Qu suggested that a special fund be established and the issuance of more home purchase subsidies to migrant workers to integrate the destocking process with the country's urbanization drive. Endi