Chinese house prices stabilise western provinces capture our attention

Despite all the doomsday predictions that China’s housing bubble would burst in 2012, the opposite has turned true. In hindsight, 2012 has been a very important year of consolidating recent gains. The financial system has been able to withstand bad loans and the need for emergency monetary policy did not materialise. In fact, October’s official data showed China’s new home prices actually firmed by more than the previous month. Prices gained in around half of the 70 cities tracked by the government survey. This compares with rises in only 31 cities in September. Only 17 cities reported losses and even these were modest.

The composition of the data for us is even more important. The north western city of Urumqi led the national gauge with a 0.5% gain in prices from the prior month. Urumqi is the largest city in China’s western interior and its economy forms an important part of Xinjiang’s industrial capacity. The gains in Urumqi stand out because the city has outperformed the usually better performing coastal and financial hubs. Shanghai prices were stable for the month while Beijing only reported gains of around 0.2%. Urumqi is also very remote, in fact among one of the furthest cities anywhere in the world from sea.

In September we discussed the impact of China’s central policy towards second and third tier cities, developing inland hubs. The extensive discussion can he found here. While Hunan and other provinces have been our main focus, the housing price performance in Urumqi shows the potential for even more remote parts of China to start picking up the slack from the more prominent coastal cities. Urumqi did experience ethnic unrest in 2009 and the central government was quick to throw its support towards large amounts of development support in the region. Investment is beginning to pay off.

China will continue to make the social impact of its policies prominent in planning its economy next year. This is always a primary motivation, as illustrated by Urumqi. The Xinjiang region received seven new expressways and 11 railways with total investment in the order of RMB145bn as part of the 2009 fiscal injection package. Gains in Urumqi’s property prices might be distorted by one off impacts, but we’ll be watching very closely to see how the numbers print next month. Many traders have overlooked the huge potential in second and third tier city development, perhaps the housing numbers are starting to signal an important investment trend for China in 2013.

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