Morgan Stanley China Property: Sales Re-Weakened in May; We Expect a Weaker 3Q
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Morgan Stanley reports that Chinese property sales weakened again in May, with sales area declining 15% year-over-year and falling 8% month-over-month, missing market expectations. Average selling prices dropped 3% sequentially and 5% annually, highlighting persistent deflationary pressure. The firm expects third-quarter sales to deteriorate further, potentially reaching a 20% year-over-year contraction. This bearish outlook is driven by diminishing policy stimulus effectiveness, weakened homebuyer confidence near historic lows, and elevated inventory levels. Inventory destocking cycles in key cities have extended to 22 months, well above healthy benchmarks. New starts collapsed 25% year-over-year, reflecting deeply depressed developer investment appetite. Consequently, the land market remains sluggish, with land transfer revenue plunging 30%, pressuring local government finances. Developers continue to face severe cash flow constraints, which may force additional price cuts and promotional campaigns to sustain liquidity. The industry's overall credit risk remains elevated, with potential for increased default events. Policy interventions, including interest rate cuts and purchase restriction relaxations, are showing diminishing marginal returns. Morgan Stanley maintains a cautious industry view, noting that near-term recovery momentum is insufficient to offset structural headwinds.
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