Household bank deposits are growing at a healthy clip of +15% p.a. CAGR (Chart 10). Note how household deposits' growth accelerated at end 07 to 1H08 during the last liquidity squeeze. In China, corporate deposits are the first to rise on easing of credit (a rise in bank loans means an increase in company deposits). When company cash deposits are eventually spent and invested, part of that trickles down to payments to individuals, and bank deposits of the latter rise. With healthy deposit growth, i.e., savings, it is hard to see why households in China would suddenly rein in spending to raise savings further.

Corporate bank deposits, at nearly Rmb40 trillion, are equivalent to 90% of GDP!

What other economy has such a high level of corporate cash? Thus, the so-called credit squeeze is not affecting big companies and well-connected SOEs. These entities are controlling a huge cash pile. They will use opportunities from the current credit-tightening to gobble up weaker players, acquire investment projects and grow even stronger. The small SMEs, those related to the export sector, are being affected by the tightening. Ditto, developers who are over geared.

Housing prices look set to fall. The widening gap between pre-sales and completion (Chart 11) indicates construction delays as developers' cashflows are being squeezed. On Chart 12, the slowdown YTD 2011 in construction-related fixed investment in is also a manifestation of the squeeze. In response, developers have been stepping up supply, i.e., launching pre-sale projects (blue line, Chart 11). But the jump in supply is overwhelming demand (violet line). A price war is developing nationwide and we are looking for a fall in home prices greater than the 10-20% industry consensus.

Eoin Treacy's view China's property prices are high by just about any standard and are an impediment to raising the living standard of an increasing number of people. This is a Communist Party priority as they attempt to quell dissent. Therefore efforts to calm inflationary pressures have focused on the housing sector. Forcing banks to raise reserve requirements to the current 21.5%, had the twin aim of partially withdrawing the 2009 stimulus and restricting access to new loans for property investments.

Despite this property prices have continued to rise, particularly in Tier 1 cities such as Beijing, Shanghai, Shenzhen and Guangzhou. One of the primary reasons the Chinese market is so prone to speculation is because the spread between the deposit rate and the lending rate is so wide. This is a positive for banks but is a disincentive for consumers. Deposit rates have risen to 3.5% from 2.25% over the last year but are still at comparatively low levels. The reluctance of the PBOC to hike short-term interest rates aggressively reflects their attempts at a targeted squeeze of the property market rather than a broad based approach.

Their efforts appear to be finally gaining some traction. Since lower housing prices were one of the primary goals of the current tightening, once this objective has been achieved it is reasonable to expect a more dovish tome from the central bank. This could be a catalyst to stoke investor interest in the stock market.