The Housing Bubble

A report from the South China Morning Post. “Mr Shen Weipeng is a 29-year-old trust manager in Beijing, working in one of the highest-paid vocations in China. His after-tax income last year was about 260,000 yuan (S$52,000). He decided to cut his spending this year by replacing his favourite cocktail with water, cancelling a planned trip to Europe and sticking with his current mobile phone even though the screen is badly cracked.”

“Mr Shen said he was trying to save money because he had a monthly mortgage payment of 11,000 yuan on his flat and was concerned about his income prospects, with the government’s crackdown on shadow banking having significantly reduced average incomes in the trust investment industry. ‘I just have no better choice than to cut back on my spending,’ he said. ‘My income was cut by about 30 per cent this year from a year earlier because of the broad downturn in my industry.’”

“Mr Shen’s financial situation is not unusual in China, where discretionary spending is often limited by a large mortgage payment and confidence about future income has been undermined by a less optimistic economic outlook. At the end of last year, total outstanding individual mortgage loans and borrowing from the public housing fund rose to 26.4 trillion yuan, meaning that housing-related loans made up 57 per cent of overall household debt, according to government data.”

“Considering that many Chinese use consumer loans to come up with the down payment on a house or to help pay their monthly mortgage bill, the weight of real estate debt on purchasing power is even heavier. Mr Qin Han, chief fixed-income analyst at Guotai Junan Securities, wrote in a research note last month about the recent emergence of the ‘consumption downgrade’ phenomenon. ‘Mortgages are an obstacle to consumption that cannot be avoided,’ he said. ‘Rents are also significantly squeezing consumer spending.’”

“‘The lipstick effect has emerged in China,’ Mr Li Xunlei, chief economist with Zhongtai Securities, told the South China Morning Post, referring to the phenomenon of consumers being more willing to buy less costly luxury goods instead of more expensive ones.”

“A number of articles on how to change one’s lifestyle to save money have gone viral on Chinese social media this year. ‘No afternoon tea, just use the time to diet,’ one article advised. ‘No more taxis or ride hailing, buses and shared bikes will do. And no new clothes; after all, work uniforms should be fine.’ One question posted on Zhihu, the Chinese version of question-and-answer site Quora, about ‘how to downgrade consumption to survive 2018′ has attracted more than 1,300 answers and 17.5 million views.”

“The responses offered suggestions such as ‘no food delivery, no milk tea and no electronics upgrades’ as well as ‘cooking your own food, eating Lao Gan Ma chilli sauce (only 10 to 30 yuan) and pickled mustard.’”

From Bloomberg. “Signs that China’s attempts to cool its red-hot property market are working are hard to find: housing prices rose the most in 21 months in June, and as soon as authorities squelch one buying frenzy another pops up. Scratch below the surface though, and something interesting emerges — land is going unsold in some of the nation’s most-crowded cities as the government’s deleveraging campaign and a relentless flow of property curbs squeeze developers’ profit margins.”

“A total of 419 land sites went unsold in the first seven months of 2018, up 78% from a year earlier, data compiled by China Real Estate Information Corp. show. A slowdown in land acquisitions preceded the past two housing downturns, and the surge in failed sales suggests the pattern may be repeating. ‘The series of failed land auctions shows that the home market is already in a correction,’ said Zhang Hongwei, a research director at Tospur Real Estate Consulting Co. ‘Developers will face increasingly harder times ahead, becoming forced to take a steeper cut in prices.’”

“Three suburban plots in Guangzhou attracted no bids at six separate auctions this year, even as the asking price was continually cut. In Shanghai, a small site close to the city centre drew no offers earlier this month. Land has also gone unsold in Hangzhou, Suzhou and Hefei, all considered popular markets due to a scarcity of space.”

“‘Sometimes companies don’t have enough funds,’ Liu Wei, executive vice president at developer China Merchants Shekou Industrial Zone Holdings Co., said. ‘Sometimes, under the pricing curbs, you just give up after doing the math.’”

From the Global Times. “China is ramping up efforts to tighten real estate transactions, thwarting speculation that the nation might loosen restrictions on the real estate market to stimulate economic growth amid escalating China-US trade tension.According to media reports, banks in some Chinese cities have raised lending rates to curb overheating in the real estate market. In Beijing, the average increase in rates for first-home loans was 10 percent above the benchmark rate, and 20 percent for second-home loans. An employee at a bank in Beijing told the Global Times on Monday that his bank’s rate for first-home loans was 40 percent above the benchmark rate.”

“There has been speculation that China might loosen restrictions on the real estate market to stimulate economic growth amid escalating China-US trade tension, but an industry insider surnamed Dong predicted that the real estate regulations will be further strengthened, rather than relaxed in the next six months.”

“‘The Chinese economy is now facing both domestic and external challenges, but preventing financial risks is a much more important task than maintaining rapid growth,’ Dong said, adding that deleveraging and structural reforms should remain the government’s priority. Song Ding, a research fellow at the China Development Institute, warned that while it’s important ‘to curb the pace of price increases in the real estate market, it’s also important to prevent a slump, which might lead to a financial breakdown and a plunge in growth.’”

“Auctions of land have also seen a slump in recent months, and some cities have reported failures of land auctions. For example, in Taiyuan, North China’s Shanxi Province, auctions of eight plots of land were reported to have failed on Saturday, and there has been a similar situation in some first-tier cities, including Shanghai and Guangzhou, capital of South China’s Guangdong Province.”

The Asia Times. “Let’s allow Japan to answer this most impactful of economic questions. Through the prism of Tokyo’s long experience, the bears have it. Xi’s government, after all, is reading right from the Japan Inc playbook. After Japan’s bubble economy imploded around 1990, bureaucrats fell into a decade-plus cycle of one-step-forward-two-steps-back on deleveraging efforts. The pattern: Tokyo would get serious about reducing debt levels and then, at the first sign of slower gross domestic product or market fallout, reopen the credit spigot. Close, reopen, repeat.”

“It was only about 2002-2003 that then-Prime Minister Junichiro Koizumi prodded banks to write down bad loans. The costs of that dozen or so years of dithering are still being calculated today. Glacial and unsteady clean-up efforts explain why the Bank of Japan is still holding interest rates below zero. And why, after 18 years of toying with quantitative easing, Tokyo is barely halfway to 2% inflation.”

“President Xi Jinping wants to break a cycle with which Japan is still grappling. Granted, the timing seems terrible, as Donald Trump’s escalating trade war imperils China’s $12 trillion economy. And so, Xi’s two-year crackdown on shadow-banking is taking a backseat to GDP – again. In the weeks since Trump took direct aim at Beijing’s export engine, Xi rolled out fresh fiscal stimulus and tax cuts. The People’s Bank of China, meantime, is prodding banks to up lending and easing capital requirements.”

“Easier credit means it’s now cheaper for mainland banks to borrow from one another than from the central bank. They also mean local-government leaders have greater latitude to borrow anew. It’s troubling, then, that roughly 80% of the jump in bad loans last quarter was among rural commercial institutions. Declines in capital adequacy ratios, though notable throughout China, are most pronounced among smaller banks.”

“And therein lies the Japan-like threat to China’s future as a balanced, vibrant economy. Xi is running into an inconvenient financial truth: the more he prioritizes short-term GDP gain over pain, the more he prolongs an inevitable Chinese reckoning. We’ve seen this movie before. It won’t end any better for Beijing than it did for Tokyo.”