House prices in China rose at their quickest pace in two years this January, suggesting some monetary tightening may be in the cards. The country’s central bank increased interest rates in response to a previous episode of rapid house price increases. Given receding fears over a potential ‘hard landing’ at home, and signs of stabilization in Europe, the PBOC may be tempted to tighten policy once again.
House prices in 70 of China’s largest cities rose by an average of 0.7% in January – the fourth consecutive monthly gain, and the largest increase in two years. We suspect the news was poorly received by leaders in Beijing, who appear uneasy at the prospect of a property bubble. The State Council, which is chaired by Premier Wen Jiabao, recently promised to curb rising prices, including via increased taxes. If these measures prove insufficient, officials may look to monetary policymakers for a helping hand.
The People’s Bank of China responded to a previous episode of house price pressure, in 2010 and 2011, by increasing its key interest rate from 5.31% to 6.56%. However, some of this tightening has since been unwound. The PBOC cut its key interest rate to 6.00% last summer, on the back of downside risks from a rapid deterioration in the euro area debt crisis, and a potential domestic ‘hard landing’. The likelihood of either materializing in full has since receded, providing some room for monetary tightening.
The PBOC recently hinted at using monetary policy to provide macro-prudential support. Minutes from the Q4 2012 MPC indicated that members remain vigilant to the threat of financial instability, and promised to ‘forestall financial risks’. However, it is unclear whether the recent increase in prices has been large enough to prompt action. Furthermore, policymakers may worry about on-going risks to global growth. As the latest European Commission forecasts show, it is likely that many countries in Europe are set to struggle even if the common currency does not self-implode. With that in mind, some members may favour a ‘wait and see’ approach before deciding to withdraw stimulus. Should the rise in house prices gather momentum, however, their hand may be forced.