Is China’s property market the next shoe to drop?

The Chinese government released the latest home price statistics for the month of February 2014 on March 18, and it showed that new-home price growth slowed, and was led by core first-tier cities, including Beijing, Guangzhou, Shanghai, and Shenzhen. The latest news came as the latest casualty of the Chinese real estate market, Zhejiang Xingrun Real Estate Company, a privately held real estate and construction firm based in the city of Ningbo and Fenghua, filed for bankruptcy as it owes its creditors, among which China Construction Bank (CCB) was its largest lender, for almost 3.5 billion yuan or USD 566.0 million. This is according to the Bloomberg News which reported on the story. It also does indicate that the slowdown in the housing market has impacted many small developers, and there have been recent comments by several credit rating agencies that the Chinese property developers, especially those small, privately-held developers, are highly vulnerable to the economic slowdown, and shortage of credit. These issues could inhibit some of the overall Chinese growth momentum going forward.

According to Bloomberg News reports on March 18, the breakdown of the latest housing data published by China’s National Bureau of Statistics showed that prices in Beijing and the southern business hub of Shenzhen, which is also the closest Chinese city to nearby Hong Kong, each rose 0.2 percent in February, and one of the slowest pace since October 2012. Over in Shanghai, home prices rose just 0.4 percent, one of smallest increases since November 2012, while Guangzhou’s home prices rose 0.5 percent. On the whole, prices rose in 57 of the 70 cities tracked by the Chinese government, and this compares to 62 in January 2014, but many of such price rises are similar to the ones seen in some of the major Chinese cities. It is quite clear that based on the latest low single digit home price appreciation (HPA) results in most of Chinese cities, the real estate outlook in China is expected to look quite grim in the months ahead. Although, the sharp drops in housing prices might have satisfied the overall objectives set out by the Chinese government, as it tries to engineer the direction of the overall economy, I believe that there could be some risks of the Chinese government overshooting its objectives, and might potentially cause a housing ‘crash’, resulting in investors fleeing away from risk sensitive sectors, including the Chinese banks, and others, and eventually leads to a prolonged slowdown of the Chinese economy. It does no good in anyone’s investment interests that the slowdown of the housing market could trigger potential credit shortfalls, investors rushing out for exit doors, and losing the faith and trust on China’s overall financial stability.

Given the close knit nature of housing and availability of credit, tighter credit markets do not help improve the overall outlook in the real estate markets in China. The latest statistics published by the People’s Bank of China (PBOC) showed that credit growth trailed analysts’ estimates in February 2014 as aggregate financing stood at 987.3 billion yuan, less than the median estimate of 1.31 trillion yuan surveyed by Bloomberg News. Private generated data, namely those statistics published by SouFun Holdings Ltd, one of China’s leading real estate portal, showed that HPA slowed for a second month in February by 10.8 percent as compared to a year ago.

With all these Chinese housing data figures, one might be wondering which sector of the Chinese economy will likely falter in 2014. As a reality check, one might note that the Shanghai Stock Exchange (SSE) Property Index fell 0.9 percent at the close of trading on Shanghai Composite Index, and was the only measure declining among the five core industry groups being closely watched by investors. The drop is hardly surprising as the past booming Chinese economy have resulted in rapid urban development, which resulted in the current downturn as supply outstrips demand. With credit markets tightening, developers facing liquidity crunches, housing sales turnover slowing down, and bankruptcies are on the rise, especially with the latest news that real estate developer, Zhejiang Xingrun going under, there is an increase in the overall pessimistic outlook, and perhaps risks of the housing markets being the next shoe to drop, and the Chinese government could be facing a dilemma over whether they will be able to put aside policy differences, such as the gradual adoption of pro-market reforms, in favour of a large-scale bailout of the real estate industry, similar to the one seen five years ago, as former investment bank Lehman Brothers over in the United States, was starting to crumble in early fall 2008, and led to the Global Financial Crisis (GFC). The boom in US housing markets came to a sudden halt, sparking volatilities, and empty lost hopes among millions of Americans. With those events unfolding at the back of most investors’ minds, there are potential questions over whether the Chinese government will be able to maintain social order, while keeping the Chinese people satisfied and reasonably comfortable with their daily livelihoods just as when the possible massive declines in housing prices are occurring. It is difficult to imagine such scenarios taking place, but there is an urgent need to start thinking about it and be prepared for such scenarios taking place in China.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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