China Growth Cools

Economic growth in China continues to cool as manufacturing falls to its lowest output in a year.

According to the Purchasing Managers Index published by HSBC and Markit Economics, Asia’s largest economy saw its manufacturing industry contract in the lowest reading in a year. The PMI fell to 49.2 in April, far below expectations.

Economic growth in China continues to cool as manufacturing falls to its lowest output in a year.

According to the Purchasing Managers Index published by HSBC and Markit Economics, Asia’s largest economy saw its manufacturing industry contract in the lowest reading in a year. The PMI fell to 49.2 in April, far below expectations.

Despite the fall, shares in both Hong Kong and Shanghai posted gains in both markets, further adding to worries that return-hungry demand and not market fundamentals are driving the nation’s stock market. However, some analysts point to more positive economic indicators that suggest that the initial PMI reading may fail to account for the nation’s other economic strengths.

Bolstered Housing Demand

One promising sign of a Chinese rebound comes from SouFun Holdings, a real estate listings service that posted improved earnings, helping its share price rise nearly 9%. The improvement comes after a government report that shows home prices are beginning to improve in China, although growth remains negative throughout the country.

According to the National Bureau of Statistics, new home prices fell in March on a month-over-month basis in only 49 of the 70 cities tracked by the agency, 17 less than in the previous month. Total year-over-year prices fell by 6.1%, but home sales rose 66% from the prior month, indicating more homebuyers are looking to snap up bargains in Chinese cities. Existing home prices fell in 48 cities, down from 61 cities in February, while rising in 12 cities.

In the largest cities, price gains are modest; new home prices rose 0.7% in Shenzhen and 0.3% in Beijing, after falling for eight months. Shanghai and eight other cities saw unchanged prices.

Experts attribute an improving real estate market to more accommodative lending policies from the People’s Bank of China, which has cut interest rates twice in the last six months in an effort to boost home sales. Additionally, the Chinese government loosened rules on mortgages at the end of March in an additional effort to get more people to qualify for home purchases.

Analysts expect the impact on the Chinese market to be swift, and the NBS data seems to confirm that an improvement in demand is slowing the fall in home prices previously seen throughout China’s cities.

Uncertain Equity Future

While home prices fall, but show signs of a rebound, controversy over Shanghai’s meteoric stock market continues to mount. After doubling in value in a year, some analysts are warning of a demand-driven bubble fueled by unsophisticated investors looking for an alternative to the weakening housing market. Others argue that stocks remain undervalued, and P/E ratio averages should begin to fall as China’s economy matures and becomes more reliable.

Among the critics of China’s equity boom, American private equity giant Blackstone has warned that China’s seven-year high prices are unsustainable. However, Bloomberg News reports that Singapore-based APS Asset Management disagrees, arguing that Chinese stocks will more than double in the next three to five years, thanks to strong and improving earnings growth throughout the market.