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Home / Business / Companies

Liam Dann: Year of the Sheep needs wise shepherds

Liam Dann
By Liam Dann
Business Editor at Large·NZ Herald·
22 Feb, 2015 04:00 PM4 mins to read

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China's National Bureau of Statistics reported new home prices fell in 69 of 70 cities by an average of 5.1 per cent last month. Photo / NZME.

China's National Bureau of Statistics reported new home prices fell in 69 of 70 cities by an average of 5.1 per cent last month. Photo / NZME.

Liam Dann
Opinion by Liam Dann
Liam Dann, Business Editor at Large for New Zealand’s Herald, works as a writer, columnist, radio commentator and as a presenter and producer of videos and podcasts.
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With China’s property market cooling and equity markets soaring to precarious heights it’s a worrying time.

Happy Chinese New Year. Welcome to the year of the Sheep, or Ram, or Goat.

If there's a some confusion among Westerners over which it is, that's because the written Chinese character leaves room for interpretation. Literally it is the year of the horned animal, yang, and the word can be applied to sheep or goats.

Unsurprisingly, given New Zealand's long standing cultural affinity with the creatures, we seem to be leaning towards the sheep.

Regardless, traditional Chinese beliefs suggest the year should harbour the relatively calm and placid characteristics of the sheep along with the promise of peace and prosperity.

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That sounds like an ideal mix for the global economy in 2015 and particularly for China which doesn't need anything dramatic to derail its delicately placed economic slowdown and transition.

But as compelling as the metaphor of the docile sheep may be - peacefully grazing in a field, slowly fattening - there is another that will be familiar to New Zealanders who've grown up around farms or at the very least watching A Dog's Show .

This is the image of the panicked flock bolting mindlessly in the wrong direction, following the lead of the most nervous and jittery member. Sheep in this mood can be infuriatingly irrational.

As a metaphor it's a not a bad one for investment markets when the heat goes on.

And that is exactly the behaviour that Chinese officials will be on high alert for this year.

The property market in China is cooling but equity markets are still soaring. The threat that either of these markets melts down in an uncontrolled fashion presents a considerable risk to China's carefully structured policy of transition. The transition policy seeks to slow growth and shift consumption to create a more sustainable domestically led economy.

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18 Jan 04:00 PM
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25 Jan 11:48 PM
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A gentle and steady fall is the preferred form of market correction just as a flock of sheep marching calmly and slowly into their pen is the farmer's preferred path.

At this point Chinese property appears to be behaving well.

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The World Property Journal cites China's National Bureau of Statistics (NBS), as reporting that in January new home prices fell in 69 of 70 cities by an average of 5.1 per cent from the year-ago period.

Beijing and Shanghai registered price declines of 3.2 per cent and 4.2 per cent respectively in January 2015, compared with the 2.7 per cent and 3.7 per cent respective declines seen in December 2014.

Two years ago when property prices were still soaring I visited China and talked to young people in Shanghai and Beijing. Their fears about access to the property market were startlingly similar to those of young Kiwis.

It is hard to imagine they would be anything but thrilled to see prices easing in the biggest cities.

But with property accounting for some 15 per cent of China's GDP, and for a great deal more culturally in terms of the economic confidence and security of the Chinese people, the Government will be keen to ensure the trend does not accelerate.

The oversupply of urban housing is well documented in China. A huge programme of construction over the past decade has seen whole towns and cities spring up - some of which remain so underpopulated they have been dubbed ghost cities.

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China's population is still only about 50 per cent urbanised. Some 10 million people migrate from the country to cities every year.

That's driving a good chunk of domestic GDP and should be underpinning the property market.

But despite that supply is ahead of demand. This is a point that should be noted by those in New Zealand's property sector who can't envisage a scenario where prices fall.

Already the People's Bank of China (PBOC) has loosened banking restrictions and dropped the official cash rate to help reignite the market.

The PBOC and local city officials have far greater capacity to use their regulatory powers than their New Zealand equivalents.

For more than a quarter of a century they have managed to control unprecedented growth with great precision but there are big challenges ahead.

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Meanwhile, as property eases Chinese stock markets have continued to soar to precarious heights.

Government officials are attempting to cool equity markets by clamping down on lending for leveraged investment.

A serious property or stock market crash in China would be an unprecedented and alarming event.

And a global financial crisis emanating from China would be far more directly damaging to New Zealand than the fallout from the US version.

Officials face a difficult regulatory balance and investors, like sheep, are notoriously difficult to pull back under control once spooked.

Thus far the Chinese Government has proved to be a master shepherd, but it may face its biggest test in the Year of the Sheep.

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