The drop in prices in July was largely brought by a decline in food and energy prices. Pork prices dropped 26 per cent year on year in July and automotive fuel declined by 13.2 per cent.

Removing food and energy components from the inflation calculation, core inflation actually rose 0.8 per cent compared with a year ago, the largest increase since this January. Travel services also saw a sharp rise in prices, up 13.1 per cent year on year, given the holiday season.

Retail sales data in July showed that consumers were still spending in sectors such as catering, but they are cutting back on housing-related spending. If people are not moving into new homes, they are not spending on new furniture or electrical appliances. Beyond household spending, sluggish housing sales meant property developers were struggling to make profits and faced liquidity pressures.

The most recent example is Country Garden’s failure to meet the interest payments on their bonds. Falling land sales also means lower local government revenue, which weakens their ability to fund infrastructure projects to stimulate the economy. The housing market requires a more prompt and robust response from the authorities.Many local governments have already relaxed restrictions on home purchases. Banks have reduced mortgage rates and made home loans easier to get. However, home sales continue to be subdued. The soft job market means potential buyers do not feel confident enough to make such a big decision.More importantly, residential property prices have fallen in the past two years, and the government’s commitment to maintain housing affordability means property prices are not expected to rise much. This has reduced the appeal of real estate as an investment asset, which in turn took away some part of the demand.The People’s Bank of China has already responded to the latest bout of weak economic data with a cut of 15 basis points to the one-year medium-term lending facility rate on August 15. Since inflation is low, real interest rates in China are still high relative to other major economies, implying more room to ease monetary policy.

Cutting interest rates would, at least in theory, encourage companies and households to save less and spend more. However, additional measures to boost consumer and business confidence would make such monetary stimulus more effective.

Allowing property prices more room to rise could help boost sales and address a number of issues at the same time. The dilemma facing the authorities would be how to relax price restrictions while maintaining their credibility in ensuring housing affordability.

The moment of reckoning nears for China’s property market as crisis deepens

Beijing has also emphasised the importance of private-sector companies and its desire to facilitate growth. The private sector, especially small and medium-sized enterprises, are key to boosting the job market and investment.Following several years of regulatory changes facing the technology sector, more predictable policy and greater support to start-ups would be welcome. The latest announcement by the State Council on policies attracting foreign business investment is a step in the right direction.China might not be looking at a large-scale stimulus programme for now. However, as more sectors come under stress, the need for a more comprehensive boost will emerge. This could be the jolt that equity investors need to take another look at Chinese companies.

Tai Hui is chief market strategist for the Asia-Pacific at JP Morgan Asset Management

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