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China Property Bubble Deflates

The Financial Times today appears extremely concerned today about the state of the Chinese housing market, running two stories with sobering news about the industry’s prospects. Many are beginning to see warning signs that a crash in China’s “housing bubble” may be imminent — housing prices now appear to be falling after years of dramatic increases, prompting concern from China’s booming construction industry:

Equity markets are also delivering a brutal verdict. Since the start of the year, Chinese property stocks listed in Hong Kong have tumbled 40 per cent, compared to a 22 per cent decline in the benchmark Hang Seng index.

“People are worrying about default risk, and the implications for property companies themselves, for the banking system and for the overall equity market,” says Agnes Deng, head of China equities at Baring Asset Management. […]

What is without doubt, however, is that Chinese property developers took on enormous amounts of debt in recent years as they pursued aggressive expansion plans, leaving them little room for manoeuvre if property sales do fall.

Making matters worse, developers are losing access to funding, having been frozen out of public bond markets for the past three months. Meanwhile, state-owned banks are following government orders to rest­rict lending to all but the most powerful developers.

This is not known only to those close to the industry — the rows of empty new towers which ring many of China’s cities are a highly-visible testament to the problems the industry faces. In another article, the FT interviews Chinese developers, who have a similarly bearish outlook:

“The prices of these apartments will almost certainly continue to rise in the future, by at least 15 per cent a year,” one young salesman declares.

Beijing boasts China’s most expensive real estate, but across the entire country similar high-priced half-built residential complexes now ring every city.

Many economists say a resurgent real estate market was the key driver of China’s rebound from the financial crisis in 2008, as a large portion of the fiscal stimulus and government-directed credit boom was channelled into residential property. […]

This is ominous news for the more than 50,000 property developers in China who have made a killing in the last decade. But it is also potentially dangerous for the entire Chinese economy, and by extension the struggling global economy.

“Housing investment is about a quarter of fixed asset investment and gross investment is about half of GDP so you can see it is a very important support [for the economy],” says Huang Yiping, emerging Asia chief economist for Barclays Capital. “If you include the industries producing cement, steel and so on it has an even bigger impact.”

Taking steel as an example, China is by far the world’s largest consumer and Chinese real estate construction directly accounts for 40 per cent of the country’s steel usage.

When other property-dependent sectors are taken into account, analysts say as much as two-thirds of total Chinese steel consumption is broadly driven by property spending.

This news is extremely discouraging, both for China and the world as a whole. For the past three years, the one bright spot in the global economic crisis was the rapid growth in wages and demand in developing countries — nowhere more so than China. As the Old World continues to deal with the intractable problems of low employment, crippling debt, and depressed demand, many had hoped that the growth of wages and industry would pick up the slack and lead the world economy out of its doldrums. A major housing collapse in a country as large as China is the last thing the world needs with Europe and America already floundering and open discussion of a double-dip.

Bubbles often form in quickly growing economies and it is more than likely that China’s combination of rapid and sustained growth with a politically motivated banking system will sooner or later lead to some painful years.  This would not be the best time for the correction to occur; let us hope that China can keep its property market on course for a soft landing.

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  • Luke Lea

    What else would you expect from a centrally planned economy? The laws of supply and demand (or in China’s case of demand and supply) are only allowed to operate in the export sector. Everywhere else it is the political authorities (party elites) who make the big capital budgeting decisions with no real market signals to guide them. A modern industrial economy is far, far too complex to do this rationally. Hence apartment towers with no tenants, high speed trains with no riders, and, apparently, whole cities without residents.

    According to Western observers of the Chinese banking system, this isn’t likely to end happily, or even peacefully, when you consider that much of the capital being wasted comes out of the private life-time savings accounts of Chinese workers who — because of China’s “one-child-per-family” planning policy — were relying on this money to take care of themselves in old age.

    For them, like the Irish of yesteryear, history truly is a nightmare from which they are trying to awake, as Stephen Daedelus famously defined it in James Joyce’s Ulysses

  • More data coming out suggesting China’s housing market might be hitting a wall:

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