Earlier imbalances in China's economy are making a comeback

Buddhika Weerasinghe/ Getty Images

Chinese new home prices continued to push higher in April, logging the fastest annual increase in two years.

According to China’s National Bureau of Statistics (NBS), new home prices rose by 6.2% from April 2015, an acceleration on the 4.9% pace seen in the 12 months to March.

From March prices grew by 1.2%, the twelfth consecutive increase and the fastest growth seen in years.

According to the NBS, prices increased in 46 of the 70 cities surveyed, up from 40 in March.

Buddhika Weerasinghe/ Getty Images

While price gains in larger cities continued to outperform those in other areas, there was some promising news for prices in smaller cities which rose compared to a year earlier.

“Growth in first and second-tier cities continued to accelerate, while third-tier cities reversed decline to post growth,” said Liu Jianwei, a statistician at the NBS.

By individual city, the southern Chinese metropolis of Shenzhen retained the title as the hottest, and to some bubbliest, property market in the country with prices gaining 62.4% from a year earlier.

Shanghai and Beijing, China’s finance and political capitals, took out second and third spots respectively with annual price gains of 28.0% and 18.3% respectively.

Though the monthly increases in Shenzhen (+2.3%) and Shanghai (+3.1%) were slower than those recorded in March — indicating that measures introduced by authorities to curb price growth may be starting to take effect — the annual rates of growth in both cities were higher than levels seen in March.

While the broad-based improvement in prices across the country may be seen by some as a welcome development, to others, the enormous price gains in larger Chinese cities are merely adding to the risk of a severe, and dangerous, correction in China’s property sector in the years ahead. 

Gerard Burg, senior Asia economist at the NAB, is one analyst who thinks the recent rebound is not being driven by fundamentals but rather an attempt by authorities to reinflate property prices to spur on other sectors in the economy.

“Policy changes that have relaxed purchase requirements, looser credit and the poor performance of alternative investment options have started to re-inflate the property bubble that had somewhat deflated across 2014 and 2015”, said Burg in recent research note to clients. 

“At a fundamental level, little has changed in China’s property markets – with excess supply persisting in many locations.”

Despite years of unsold housing inventory that continues to exist in smaller Chinese cities, the desire to spur on construction and industrial activity through higher house prices is working, at least for the moment.

Property investment increased 9.7% year-on-year in April while the amount of floor space sold over the same period rose to 117 million square metres, up 44% on the levels of a year earlier.

China’s steel industry, plagued by severe overcapacity, is also rebounding, producing more crude steel in March than any month on record according to figures released by the China Iron and Steel Association (CISA).

If you look at China’s industrial, construction or property sectors, all are humming right now.

Whether that’s a good thing is another question, particularly as these are the same industries that drove Chinese economic growth in the past, and the same ones that created the imbalances that policymakers have been grappling with — at least in theory — of late.

NOW WATCH: Humans are defying the law of evolution