June 4, 2014

Challenging The Post-Tiananmen Compact

A report from China Daily. “Housing prices will remain under pressure for the foreseeable future, and the government isn’t expected to take any steps to boost the market, industry analysts said. Many developers launched innovative sales campaigns during the three-day Dragon Boat Festival, which ended on Monday. Downward pressure on the prices of pre-owned homes has become more evident. Yu Lulu, an agent with property brokerage firm Homelink Real Estate, said the average price in the residential community he’s responsible for has fallen more than 10 percent in the past four months. ‘After the market adjustment, prices have become more affordable, and there are more bargain-hunters,’ said Yu.”

“According to Wang Tao, China economist with UBS, typical analysis of property downturns focuses on price corrections, but she said that construction volume matters more in the case of China. A big drop in construction activity—even without a large price correction—would likely have a serious negative impact on the industrial complex and, through that, economic growth and banks’ balance sheets.”

“‘We think property construction is facing a serious adjustment, and the era of the secular property boom is perhaps behind us. Our sensitivity analysis suggests that a 10 percentage point drop in the growth of construction volume would result in a 2.5 percentage point drop in GDP growth, including second-round effects,’ said Wang.”

Want China Times. “Zhang Dawei, an analyst with Centaline Property, said the property slump began early this year and the trend of a cyclical adjustment in the market is now very obvious. He said that this is the first property slump in history that was not a result of policy factors, which he said could lead to a longer and deeper adjustment period, especially in non-nuclear cities. The recent market slump has been attributed to the rising real estate mortgage and credit because of fund shortages, with some cities having more supply than demand, and bidding farewell to a time of insufficient supply.”

“In addition, regional real estate price cuts have spread to eastern Chinese provinces such as Zhejiang, Jiangsu and Jiangxi. At the same time, potential buyers have adopted a ‘wait and see’ attitude after seeing the continued price drop as real estate agents began adopting the strategy of ’surrendering part of the profits in exchange for more sales.’”

From NTD TV. “Property price cuts in Beijing are much higher than in the neighboring cities during May. The house oversupply is over 80 percent in 35 major cities. Beijing Central Line real estate chief analyst Zhang Dawei: ‘Most house buyers are hesitating because Beijing credit is relatively tight, but low-cost affordable houses are available. The house market might go into a tailspin if there is no large credit release and bailout with continuous price decline.’”

“Beijing Maitian Real Estate Broker Zhang Ze: ‘Money is tight in the bank and hard to be loaned out because many enterprises are short of cash. Some enterprise bosses sold their own houses at low prices to raise cash. Banks don’t have liquidity so are having to use real estate.’”

The Epoch Times. “An established fact is that China’s property market has long been in a state of oversupply. Data provided by China Real Estate Research Association in 2012, suggested that new construction area in the country is around two billion square meters, making up half the world’s total each year; over 70%, or 1.4 billion square meters of the new construction area is for residential purposes, and over 40% of which is in first- and second-tier cities in China. The above figures did not include housing area completed in 2013. The National Bureau of Statistics put the figure at 1.067 billion square meters.”

“With so many flats, who are the real buyers? Judging from property prices, the vast majority of the middle class and grass-root people could not afford to purchase their own flats. Therefore, home buyers are mainly officials and wealthy people who seek to preserve their asset. This is a fact confirmed by media exposure of the ‘housing family’ in recent years.”

“China Vanke’s chairman Wang Shi stated publicly that Nanjing municipal government fined the company 40 million yuan for a reduction in real property prices in 2008. Wang’s statement was backed by others in the industry. China’s property market, similar to the country’s stock market, has come to rely solely on confidence as a result of over-speculation. The characteristic of a market like this is that people would only have confidence in it when the prices are rising.”

“The real trouble is that in a market, supply and demand has a law of its own. Forcible intervention could only be partially effective over a given period; it is not possible to be effective at all times. Measures a government can take to regulate the economy have their limits and they are not omnipotent after all.”

From Forbes. “You may not be aware of it, but tomorrow is May 35th – or at least, it is to the hundreds of millions of Chinese computer users who are unable to refer to the June 4 1989 Tiananmen Square protests more directly. China is making an all-out assault on freedom of speech for the 25th anniversary of the event. Over the last few days, it’s blocked those international versions of Google’s search engine that were previously available. Anti-censorship monitor GreatFire describes it as ‘the strictest censorship ever deployed.’”

“As China loses many of its growth drivers – cheap labor, exports and investment – analysts are predicting that the country’s GDP growth will fall to a mediocre three or four percent per year over the coming decade. And, as Pei Minxin, director of the Keck Center for International and Strategic Studies at Claremont McKenna College, points out: ‘Once growth falters, the Communist Party’s rule will be increasingly vulnerable as its performance-based legitimacy erodes.’”

From Bloomberg. “Chinese president Xi Jinping’s unbridled effort to keep growth from falling below the official 7.5 per cent target is cementing China’s fate. China is investing just as much as it did in 2008 and 2009, when authorities were desperately trying to avert a slowdown. Just as debt troubles in Japan, Europe and the US ended badly, so will China’s. Why, then, with so many clear examples of financial excess leading to ruin, is Xi continuing down this road? Blame it on the ghosts of Tiananmen Square.”

“In the aftermath of the crackdown on student protesters on June 4, 1989, China’s leaders made a bargain with their people: We will make you richer, as long as you no longer dissent. After the crash of Lehman Brothers, the regime had to go to extraordinary lengths to keep up its end of the bargain, pumping up what was already the world’s highest investment rate. In doing so, China itself became a Lehman economy — powered by shadowy funding sources, off-balance-sheet investing and unconvincing claims that all remained well.”

“Yet Xi and Premier Li Keqiang apparently can’t bring themselves to roll back those policies and rebalance the economy away from exports and toward more consumption. They know that if they do so, growth will slow a lot, challenging the post-Tiananmen compact. Local-government debt risks are bad enough. Investors such as Patrick Chovanec of Silvercrest Asset Management are right when they warn that China’s property bust is the real time bomb. If the main asset underpinning everything from local-government finances to state-owned-enterprises goes bad, watch out.”

“Credit expansion can’t outpace GDP growth forever, not even in China. As Xi flexes his muscles around the world and ramps up military spending, he would do well to reflect on this irony: The very thing from which his party has derived its strength and legitimacy in the 25 years since Tiananmen — a booming economy — is fast becoming its biggest weakness.”

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