China realty goes BOGOF

The National Day Golden Week is ended in China.  Traditionally, the Golden Week (or more broadly, September and October) has been a peak season for real estate sales for China.

No longer.

The increasingly tough purchase restrictions in some cities and credit and monetary tightening have crushed the transaction volumes across the country for the best part of the year, even though prices haven’t moved much lower on the whole.  Nonetheless, real estate developers are already feeling the impact of low transaction volume, namely problems with their inventory build up and cash flows as they are unable to sell as many properties as they planned.  Developers have probably counted on September and the Golden Week, but the Golden Week has turned sour.

Shanghai, for instance, experienced the worst Gold Week holiday in 6 years.  Only 398 units were sold in the primary market for the entire the 7-day long holiday, which is only 20% of the same period of last year (in other words, sales dropped 80% year-on-year) according to  According to Xinhua, one developer in Jinan tried to sell their flats by offering gifts like iPads and other electronic products, but without much success.  Beijing has been doing somewhat better according, as 866 units were sold in the first 6 days of Golden Week, only 10% fewer than last year, but 62% lower compared to the first week of September.  In Nanjing, one developer even offered a buy one (house) get one (flat) free (BOGOF) according to Xinhua, as that developer has failed to sell those houses since December of last year.

In other news, CREIS data shows that home prices in 100 cities in China fell in September on a month-on-month basis by 0.03%.  It does not sound significant, though it is the first month-on-month fall in 13 months.  With the on-going weakness in terms of transaction volume and the increasing pressure on developers, more price cutting should be expected in the coming months and quarters.

Of course, the news isn’t all bad in the Golden Week.  Retail sales appears to be doing fine in various cities.  Even in Wenzho, where businesses are squeezed by the extreme interest rates of the shadow banking sector and folks are scrambling to sell properties, retail sales for the week were up 12.4% yoy according to Xinhua.  This figure should be in nominal term though, so the figure would be around 6% in real term, which is somewhat less impressive.  Nevertheless, it is still growing despite the debt crisis behind the scenes.

Other news on Wenzou is less encouraging. Continuing with our on-and-off coverage on the Chinese underground banking crisis, here’s another shocking piece of news.  In the epicentre, Wenzhou, reports that 90% of families in Wenzhou are involved in underground banking in one way or another.

In the face of high inflation and low deposit rates in the formal banking system, large number of these families are seeking higher yields, thus their money has found its way to the shadow banking system.  As monetary tightening made credit less available in the formal banking system, businesses were forced to borrow from this underground credit system (which includes stuff like loan sharks and pawn shops).

Although the current epicentre is in Wenzhou, these activities exist everywhere in China. Last week, Dong Tao of Credit Suisse wrote in a note that the underground banking system is a time bomb, and poses a potentially serious problem to the Chinese economy:

We consider the informal lending market as the most likely short-term time bomb for the Chinese economy, possibly more abruptive and explosive than the local government debt situation. Given its underground nature, it is unclear when this time bomb may explode, but something is likely to happen over the next 12 months. Either Beijing takes pro-active and decisive measures to deal with the issue, or a mini-credit crisis is likely to emerge, in our judgment.

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  1. Most measures of house prices in China are actually based on new stock sold by property developers (the primary market). And of course, developers will be the last organizations to drop their prices because it is very bad for business on so many levels.

    I would suggest that the the “secondary” resale market (which of course would represent most of the market) would be getting smashed right about now. But sadly, there doesn’t seem to be any good indexes out there to verify this, one way or the other.

    I have been trying to monitor secondary Chinese real estate listing prices. Unfortunately their anti monitoring systems are very, very good. But we will keep trying.