SinoInsight 1
On Nov. 28, the Chinese Academy of Social Sciences’ National Academy of Economic Strategy released an analysis report on Chinese property market developments by month. The report issued “early warning references” for the property market in 2020.
Per the report, housing prices are expected to generally rise in Shenzhen, Dongguan, Zhuhai, Huizhou, Suzhou, Nantong, Wuxi, and Ningbo. Housing prices are expected to generally decline in Beijing, Tianjin, Langfang, Baoding, Zhangjiakou, Cangzhou, Qingdao, Jinan, Yantai, and Weihai.
According to data released by the PRC’s National Bureau of Statistics on Nov. 15, 35 out of 70 medium- to large-sized cities in China saw second-hand property price drops in October 2019. Four of the remaining 70 cities saw second-hand property prices remain flat, while prices rose in the other 31 cities.
According to data released by Beijing-based property research organization Beike Research Institute, the average price of second-hand property in China recently dropped significantly. Average second-hand property prices in 20 out of 25 first-tier cities have fallen over the past year, in some cases by as much as 20 percent. The only first-tier city that saw rising second-hand property prices was Shenzhen, but prices only rose by less than 3 percent.
OUR TAKE
1. One of the economic predictions we made in our China 2019 outlook was: “Property prices will likely fluctuate drastically (small spurt in prices followed by sharp drops). Property prices in some areas may fall by as much as 30 to 50 percent.”
The recent CASS report and Beike Research Institute data on the second-hand property market in China is in line with our prediction. Without government intervention, we believe that there would be even steeper drops in property prices in China.
In recent years, local governments have issued several property price “no-drop” orders. From mainland media reports, the latest such order was issued on Nov. 4 by the local housing authorities of Ma’anshan City, Anhui Province. The order, titled “Notice Regarding Doing a Good Job in the Management of Commercial Property Sales,” required that property companies are forbidden from selling property at prices higher than their listed price and no lower than 10 percent of their listed price.
2. We believe that local governments have to issue “no-drop” orders to keep prices stable and prevent the property bubble from bursting. The alternative is plunging property prices, the bursting of the property bubble, and so-called “mortgage slaves” (房奴) defaulting on their home loans, a series of developments that would trigger financial system risks and a financial crisis.
Three pieces of data make clear the inherent risks of the Chinese property market collapsing.
According to data released by the People’s Bank of China, loans to residents totaled 53.6 trillion yuan as of the end of September this year. Of the 53.6 trillion yuan, 54.2 percent, or 29.05 trillion yuan, were personal home loans. In other words, a little over half of Chinese people’s per capita income is currently being used to finance home mortgages.
According to the “China Financial Stability Report (2019)” issued by the central government on Nov. 25, the leverage ratio of Chinese households reached a high of 60.4 percent at the end of 2018. This is much higher than the international average (59.7 percent) and many other emerging markets.
According to a recently released report on China’s quarterly macro leverage ratio by the PRC think-tank National Institution for Finance & Development, the residents of five of 34 cities which it researched had leverage ratios of over 80 percent. The five cities are Hangzhou (103.2 percent), Xiamen (96.3 percent), Wenzhou (91.1 percent), Haikou (83.8 percent), and Shenzhen (82.3 percent). The personal leverage ratio level in those cities were found to be directly related to property prices in those cities; put another way, those cities face substantial financial risks should property prices plummet.
3. Local government “no-drop” orders can temporarily slow down the rate at which property prices decline. However, those orders also make it impossible for small- and medium-sized property developers to lower their prices and cash out, which eventually leads to broken capital chains and bankruptcy. Failing property developers lead to increased financial risks.
According to data released by the Supreme People’s Court, 453 Chinese property developers have declared bankruptcy this year as of November 15, or a record-high average of 1.5 bankruptcies per day.
4. The CCP government is presently utilizing a range of measures to sustain the property bubble, suppress financial risks, and tighten control over Chinese society. Once risks exceed a certain threshold and a crisis unfolds, however, the CCP regime would be greatly impacted and see substantially increased political risk levels. We remain pessimistic in our outlook on China’s property market bubble and financial system risks. Businesses, investors, and governments must go beyond the news headlines to avoid risks and discover opportunities in China.
SinoInsight 2
On Nov. 22, the PRC’s National Bureau of Statistics revised up its nominal 2018 GDP by 2.1 percent to 91.93 trillion yuan.
OUR TAKE
1. It is not unexpected that the PRC would revise its earlier economic data in light of poor economic performance this year. However, one would expect the CCP to revise the 2018 GDP down, not up, so as to better “massage” the 2019 figures (see our earlier analysis of Chinese provinces faking data in 2018). Indeed, with a third quarter GDP growth rate of only 6 percent (a 27-year-low), it would make more sense for the PRC to deflate the 2018 GDP figure to hit the 2019 growth target.
Upon closer scrutiny, we believe that the upward GDP revision still achieves the effect of “massaging” this year’s GDP figure. The CCP could be planning to increase the fiscal deficit to stimulate the economy by adding more government debt.
There are two indicators used to measure the scale of fiscal deficits. The first is the proportion of fiscal deficits to fiscal expenditure. The second is the proportion of fiscal deficits to GDP, or debt-to-GDP.
The scale of fiscal deficits, however, is limited by the sources of funding that a country can use to finance the deficits. Hence, the growth rate of external debt balance must not exceed the rate of GDP growth. Ideally, a government’s debt-to-GDP ratio should be below 60 percent.
By revising its 2018 GDP upwards, the CCP can also increase the scale of its fiscal deficits and take on more national and local-level debt. In playing this numbers game, however, the CCP is indirectly confirming that China’s economic problems are very severe.
2. We believe that the CCP’s upward revision of its 2018 GDP indicates that China’s real economy is performing poorly and capital outflows are serious. While the central government has attempted to tackle the economic slow down through “quantitative easing” and increasing the amount of base money in circulation, the increased liquidity is not flowing to the small- and medium-sized enterprises that need the funds due to the weak real economy.
One of the results of the weak real economy is that banks are borrowing less from the central bank. In comparing the PBoC’s balance sheet in October 2019 with December 2018, the PBoC’s total assets decreased by 1.39 trillion yuan to 35.96 trillion yuan at the end of October; claims on other depository corporations shrank 7.14 trillion yuan to 10.44 trillion yuan; and the PBoC’s reserve money decreased by 3.21 trillion yuan to 29.88 trillion yuan.
3. The CCP government is trying to cover-up China’s poorly performing real economy. This means that the CCP regime is facing substantial economic risks. We remain very pessimistic about China’s economic prospects.
