Chinese Home Prices Show Signs of Bottom
Chinese home prices rose in June after government authorities took stimulus measures in May and June to boost lending and lower interest rates. Official data showed Wednesday that more major cities in China saw home prices rise in June as compared to May. 25 of 70 cities saw home prices rise in June versus the six that saw gains in May.
The stronger home price data reflects efforts of government authorities to stimulate the economy. The People's Bank of China (PBOC) has cut the deposit and lending rates each twice. Also, fiscal authorities have given banks more room to boost lending. Good news also came in the form of fewer cities reporting drops in prices, with only 21 cities seeing declines compared to 43 in May.
In 2008 and 2009, Chinese authorities launched a massive stimulus program that equaled about 40 percent of GDP at the time. The central authorities delegated lending rights to local governments, which invested largely in property spending and infrastructure. Combined with massive rate cuts, inflation became a problem in China and citizens bought property as hedges to the inflation. Property is one of the only real assets that Chinese citizens are able to buy, and so to avoid losing purchasing power to inflation, money was poured into real estate.
Now, inflation pressures have eased and the property bubble seems to have moderated. Should China be able to jump-start growth once again and boost inflation to "normal" levels, the fears of a hard-landing in China may be quelled. If home prices can bottom and the banks can return to health, the Chinese economy should be able to rebound. A rebound in China would also benefit the U.S. and Europe, as both economies have large trade ties to China.
Investors who believe that a hard-landing in China will be avoided could implement this thesis by investing in the iShares China/FTSE 25 Index (NYSE: FXI), a basket of 25 of China's largest companies. Also, a rebound in Chinese manufacturing would benefit industrial stocks in the U.S. such as Caterpillar (NYSE: CAT) and John Deere (NYSE: DE).
(c) 2013 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.