The most dramatic moment in Wen Jiabao’s briefing at the end of China’s parliamentary assembly on Wednesday may have been his cryptic reference to the threat of another Cultural Revolution in China.

And the most serious was perhaps his reference to the political turmoil in the city of Chongqing, in which he called on the local party to “reflect seriously and learn” from the incident in which a police commander sought asylum in the US consulate.

But, for investors, the most significant remarks were Wen’s bearish comments on the property sector. Shanghai stocks fell by 2.6 per cent, their biggest drop this year.
Wen said home prices, which are now falling after dramatic increases, remained far above reasonable levels and the government must persist with efforts to curb speculation or face the threat of a bursting property bubble.

“If we relaxed, all we have achieved would be lost and it would cause chaos in the property market, which is bad for the long-term, healthy and stable development of the housing market,” Wen said, as reported by Reuters from his final press conference of the assembly.

The moment he spoke, Chinese property stocks started reversing earlier gains. In Shanghai, the property sector, fared worst, losing 3.7 per cent.

That still leaves the property sector index up by 11.6 per cent this year, compared to the 8.7 per cent increase in the general Shanghai Composite index.

The Chinese mainland market’s performance contrasted sharply with an otherwise mostly positive day in Asian equities. Bouyed by stronger recent performance in US stocks, other exchanges were generally higher, except for Hong Kong, where the Hang Seng index finished 0.15 per cent down, dragged down by China-linked companies.

Wen’s remarks will give China property bears more ammunition. Since the autumn they have lost ground to bulls, who had pushed up shares of the five biggest Hong Kong-listed, Chinese developers by market capitalisation by an average 70 per cent since the beginning of October, before the impact of Wednesday’s news.

As Lex said on Wednesday:

Some of the rally has been of the relief variety. Investors suddenly stampeded for the exits last summer yet the property market did not completely crash. And companies have also been preparing for the worst: many of them used buoyant markets early last year to refinance debt early, easing near-term strains.

But a relief rally is just that. It seems the outlook for a soft landing is, in the market’s view, a bit better than it was six months ago. But for Chinese leaders six months is but the twinkling of an eye. As Wen’s comments made clear – not least in the reference to the Cultural Revolution – the Communist party is in for the long haul. For the record, what he said was: “There’s the possibility of the Cultural Revolution being repeated.”

Related reading
China needs a new growth model, Michael Pettis, FT
Chinese property bonds, they’re back, beyondbrics
Bubble in Chinese property, FT Video
Chinese property boom starts to wobble, FT
Chinese get property jitters as sales fall, FT

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