(Bloomberg) — Fifteen months ago, Lu Ting equated Beijing’s crackdown on the housing market to former Federal Reserve Chair Paul Volcker’s efforts to cool inflation that led to recessions in the 1980s.
As Lu predicted, China posted steep declines in home sales, while a flurry of developers defaulted on their dollar bonds. Now, the Nomura Holdings Inc.’s economist says China’s “Volcker moment” is finally over, but a housing recovery is still some distance away.
“The policy has reached a turning point, but it’s not necessarily marking a bottom for the industry,” Lu, 47, said in an interview from Hong Kong.
His comments came after the government issued a 16-point rescue package earlier this month to prop up the market. The plan marked a sharp turn in Beijing’s yearlong campaign to rein in real estate, helping push an index of developer stocks up 40% this month.
While the rescue provides some relief for struggling developers, what’s missing are measures to boost consumer confidence and spur demand for home purchases, said Lu. In addition, a full economic reopening is less likely until at least March, weighing down the housing sector as the government fine tunes its Covid Zero strategy.
“Restrictions on financing have been mostly removed, but it’s unclear if a large demand stimulus is coming,” said Lu.
Lu’s latest view isn’t controversial, and is in line with most other analysts. But when he warned about the housing market risk in August 2021, he was among the few who foresaw how severe the slump would be. He said that unlike in previous economic downturns, policymakers were determined to rein in real estate, as President Xi Jinping dealt with falling birth rates and a widening wealth gap.
While the housing market was already showing signs of cracks, investors largely underestimated the depth of the crisis. Since then, the credit spreads of junk bonds, most of which were sold by developers, have more than doubled.
A PhD in economics from the University of California, Berkeley, Lu first rose to fame during the global financial crisis. As a young economist at Merrill Lynch, he correctly predicted that China would emerge relatively unscathed. He left the US bank in 2015 to join Huatai Securities before jumping to Nomura three years later.
Growing up in Nantong, a city in East China’s Jiangsu province known for its sprawling construction sector, Lu said his local connections allow him to put a finger on the pulse of the housing market.
He said he first became worried about the imbalances in the housing market around 2016 after the People’s Bank of China provided cash for policy banks to finance shantytown renovation.
The program helped turn around the property market, but also fueled a real estate bubble in lower-tier cities. By 2018, his concern deepened after witnessing surging home prices and a borrowing binge by developers in the overseas debt market.
“The seeds of today’s problem in the housing market were sowed in those years,” Lu said.
The more recent policy shift suggests the economic pain from the recent crackdowns has been too great.
“It’s important to achieve soft-landing for the housing market,” Lu said. “But soft-landing is a multi-year process.”
–With assistance from Andrew Harrer.
©2022 Bloomberg L.P.