Photo by Jason Briscoe on Unsplash
 

As the AUDUSD heads for six-month lows, potential news out of China might offer some respite. A series of less-than-stellar economic data from the Asian giant might have left some traders worried that Australia’s largest buyer is facing headwinds. But, that has also ramped up pressure on Beijing to renew stimulus efforts, which could help turn things around.

Late last week, there were press reports that Chinese authorities were studying a new stimulus package aimed directly at the beleaguered housing industry. The sector is still a huge store of wealth for the country, meaning that a full economic recovery for China might not be possible until the building sector is on an even keel.
 

What Stimulus Measures Are Being Discussed?

According to press reports, policymakers are considinger a wide range of measures to help new Chinese homeowners to access the market. Among those are mortgage subsidies for first-time buyers, higher income tax rebates for mortgages and reducing transaction costs to buyers. The measures initially helped stocks of Chinese homebuilders rise substantially.

The housing market is key for Australia given the high demand for raw materials that it generates. Construction is the largest consumer of steel, and iron ore is one of Australia’s key exports. Australia is also expanding into the energy export business, with China also being a major consumer. Home building also requires enormous amounts of energy for processing raw materials such as cement and copper.
 

Will the Stimulus Be Enough?

While the housing sector is important, there are other issues that have been troubling the Chinese economy. These news reports over the last couple of days caused Chinese stocks to record the largest drop since Trump announced tariffs back in April. While initially negative for the market, they will likely increase pressure on Chinese authorities to redouble stimulus efforts. That could imply a “bad news is good news” scenario in China amid the stimulus talk.

One of the worrying events over the weekend, however, was the report that foreign direct investment (FDI) in Chinaa fell by 10% in October. That was the worst performance since the 1990s, as tariffs and geopolitical tensions have made investors warry of taking risks in China. Although the government has put a lot of effort into refocusing the market on the domestic economy, it is still highly reliant on foreign trade.
 

Is a Recovery in China’s Housing Market Possible?

One of the reasons for the renewed hopes of stimulus for the housing sector is its dismal performance in October. New home prices fell by over 40% compared to a year ago, suggesting cratering demand. This is despite mortgages falling to record lows in October, following prior stimulus measures earlier in the year. Over all, mortgage prices have dropped to half of what they were during the housing crisis, yet the building market has yet to recover.

One of the concerns is that the issue might have more to do with the banking sector than with consumers. Bad loan rates in China have reached multi-year highs, and efforts to lower borrowing costs to stimulate home buying have worsened bank profitability. This has left banks reluctant to give out new loans. In the end, the talk of stimulus measures might lift market hopes, but a substantial change in market dynamics might have to wait until real improvements are seen in the data.

More By This Author: