This discount had Chinese investors up in arms and the stock market stumbling to the floor. Real estate investors felt deeply insecure and murmured their protest when a bunch of developers, this week, offered heavy price discounts to new buyers in the wealthy Zheijiang province of East China. Under pressure of severe oversupply and high inventory, developers in smaller cities of China have begun discounting home prices, triggering instant panic at the stock market.

All big property developers of Hangzhou joined the price war, slashing anywhere between 2000-4000 yuan per square metre, thus attracting a large number of buyers within days. In Changzhou city in neighbouring Jiangsu province, a developer announced a 40-percent discount last week. Real estate inventory in cities like Hangzhou had reached a whopping 113,000 units by the end of 2013, and the problem is similar in many second- and third-tier cities.

Sentiments sunk even deeper because of anecdotal accounts (and rumours) of banks tightening loans for property projects until the end of March. The central bank had singled out developers this month as one of three types of borrowers at maximum risk. Credit to this sector will have to be slow because of the need to prevent risky asset bubbles. However, this sense of caution was enough to send ultra-sensitive Chinese investors into gloom. They also picked on small portions of government data which showed that home prices dropped month on month in many Chinese cities in January. The notion that weaker housing market could erode demand for everything from electric appliances to cars and furniture played mayhem with most stocks.

A combination of slashed home prices in small towns, ongoing bearish sentiment and rumours of tight liquidity for real estate companies, ensured that the Shanghai Composite experienced its biggest slump in five months. A gauge of property companies in the Shanghai index slid 2.1 per cent to its lowest level since June 2013, as more than 20 property shares traded below book value mid week.

Premature panic

But reason dictates that these unpredictable moves by property developers and banks should not be over-interpreted. Irrational fears gripping the stock market over a cooling property sector are exaggerated. China’s property market might have outgrown its boom days, but fears of imminent bubble burst and economic crash are premature. The market in mega-cities like Beijing and Shanghai will likely remain robust as real estate developers continue to invest record funds in big projects. The National Bureau of Statistics has said out of 70 major Chinese cities, 69 have seen their new home prices rise year-on-year in January. But on a month-on-month basis, six cities have seen their prices fall. This, real estate brokers say, should not be cause for panic.

The decision of property developers and bankers to pour cold water on the sector may prove to be useful in the long run as it will help to slowly defuse a housing bubble. Proactive price and policy changes are actually good for building a sustainable housing market in a country like China which is driven largely by ‘gamblers’ instincts.’

Slowdown needed

Both domestic and foreign analysts have emphasised that there is no need to panic over real estate adjustments and that the slowdown is a signal for stability. Several ‘doomsday’ commentators have overestimated the risks from the Chinese economy. For one, China’s current growth rate of 7.7 per cent still leads other economies. And second, the slowdown is an expected result of the government’s new strategy to seek quality-oriented growth. Already, provincial governments are rolling back their GDP-centric models and setting lower targets for themselves. In this clime, stock market investors would do well not to cry wolf at the slightest sign of slowdown.

The writer is a freelance journalist based in Shanghai.