China’s housing bust is go

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Good material today from around the web on China’s deepening housing bust. From China, there is gloom, via Investing in Chinese Stocks comes the latest from Pan Shiyi, CEO of developer SOHO, real estate rock star and former bull:

Summery: real estate not at the turning point, business isn’t good this year, only IT firms are supporting the commercial rental market. SOHO is doing well, capturing the IT demand for rental space.

Also from Ifeng via Investing in Chinese Stocks comes a report nicely summarising the double bubble:

China has two different housing bubbles. In the first-tier cities, prices are too high for the average worker. In the third- and fourth-tier cities, inventory is excessive. According to Shanghai E-House Research Institute, inventory climbed 2.8% in third-tier cities in August, but in first- and second-tier cities, the increases were 2.5% and 0.7%. The solution to both bubbles is lower prices.

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From BofAML comes a chartfest:

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Nothing encouraging there. From FTAlphaville, Nomura agrees it is worsening:

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And SocGen’s sees serious growth fallout:

Slower 2014 growth.

Q2 GDP growth improved from 7.4% yoy previously to 7.5% yoy, hitting the government’s target. Recovering external demand helped and infrastructure investment picked up thanks to selective policy easing. However, the momentum weakened dramatically in August, with fixed asset investment growth slowing to the all-time low. This is exactly the kind of downside risk that we have been wary of. Although we continue to expect targeted policy easing from Beijing, which hopefully could help avoid the worst scenario, near-term growth is still very likely to be softer than our previous below- consensus expectation. Hence, we revise down the (yoy) growth forecast for Q3 from 7.3% to 7% and for Q4 from 7.3% to 7.1%. Consequently, the 2014 full-year rate would be 7.2%, instead of 7.3%.

Real estate downturn to lead to further deceleration.

Since the beginning of the year, the downturn has continued to deepen. Housing prices are now falling at the quickest pace ever, which has not been able to stop the slide in housing sales. In the first seven months of the year, housing sales contracted 9.4% yoy in volume terms and 10.5% yoy in value terms, compared with growth of 17.3% and 26.3% in 2013. In response, the pace of property policy relaxation is picking up on all fronts, from speedier social housing construction to withdrawals of home-purchase restrictions and credit easing to home buyers and developers. All these measures will be helpful in mitigating near-term pain, but the combined impact will be unlikely to reverse the downtrend, given the substantial scale of oversupply. We think that real estate investment growth will continue to trend lower, likely to 5% yoy, a level only seen during the 2009 downturn. This would drag down the overall growth rate by nearly 3⁄4 ppt.

Selective easing will continue but so will reform.

With the rapid growth deceleration in Q1, the government stepped on the credit accelerator again. Both M2 and credit growth rose steadily throughout Q2. However, the easing approach was selective and targeted, mostly benefiting the infrastructure sector. At the same time, Chinese policymakers have not backed down on regulatory tightening on the shadow banking system. The preference for selective easing as well as the attention to financial risk indicates the government understands the limitation – or even the peril – of credit-driven investment stimulus. This also suggests the commitment to reform is still present. Given the challenging outlook of the housing sector, we expect Beijing to put forth more selective easing in order to avoid the worst, such as central bank relending and targeted required reserve ratio cuts. But the tolerance of short-term pain for long-term gain will rise, making more room for reform…

The South China Morning Post lists wider casualties:

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The impact on the production chain of the slowdown in the property sector is lagging the property cycle and has become evident since August. The year-to-date retail sales of related sectors were growing at double digits, with those of construction and decoration materials up 14.8 per cent year on year, home appliances rising 12.6 per cent and furniture gaining 16 per cent, whereas floor space sold in the January-July period declined by 7.6 per cent year on year. Unless the correction in the property sector is temporary, the spillover effect will likely intensify in the second half of the year and in 2015.

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Allocate accordingly.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.