Chinese await property bailout


From Investing in Chinese Stocks.

Three articles on Zhejiang markets today. One is about a new policy that will seek to massage the housing data, presumably in an attempt to shift market sentiment. The second shows the damage a real estate bust will cause. The last shows the two diametrically opposed opinions in China’s housing market. On the one side are the teetering developers and real estate agents in Hangzhou who fear for their business and see the government being in the same dire straits; a bailout must be coming. On the other side are those who see the central government opposed to policy easing. Additionally, Hangzhou serves as a bellwether for the national real estate market and the government does not want to reinflate the bubble, so no rescue is coming beyond some “fine-tuning.”

The first article (消息称杭州楼盘降价超15%限制网签:防范楼市大跌): The Hangzhou government will hide the cooling trend in the real estate market. Any price decline more than 15% below the list price will not be entered into the online registry. Developers are not forbidden from cutting prices and no sales will be stopped, though at least one developer expressed concern that advance sales permits may not be issued if the price cuts are deemed too large. The second article below likens this policy to the stock market daily price limits.

The second article (楼市低迷引发经济连锁反应 地方官员称迟早要救市): A local bank official in Zhejiang says the real estate depression leads to a chain reaction and sooner or later the government will intervene. Every industry is feeling the effect and not just those who sell directly to developers, such as steel, glass and cement producers. Many companies borrowed money to fund real estate development as well. A Shenyin Wanguo analyst estimates that if real estate investment growth falls to 14% this year and there is no government intervention, GDP growth will slow to 6.6%, almost a full point below government targets.

Real estate investment slowed to 16.7% yoy growth in the first four months of 2014, down 4.7 percentage points from 2013, and more than the 3.4 percentage point decline in growth for all of 2013: the slowdown is accelerating. Real estate sales fell 6.9% yoy in the first four months of the year, land purchases fell 7.9% and new area under construction fell by 22.1%.

Cement growth is only 4.3% yoy through April and prices have fallen for 4 consecutive weeks. One firm, Sunan Cement, expects to shut production for 10 days each month starting in June and July for fear that there will be weak demand.

Steel prices have also fallen for four consecutive weeks; glass demand turned negative in March; electricity demand is slowing.

From this article and others like it’s clear that many industries expect government intervention. Home buyers are cautious. Nearly everyone is watching and waiting to see what the action the central government takes. If the government intervenes, the slowdown may bottom out or the bubbles may reinflate. If the government does not intervene (or doesn’t do enough), the market will tumble as those waiting decide to take action. Right now is the calm before the storm.

The third article (开发商吐槽:降价也是等死 不信政府见死不救): Hangzhou held a 4-day real estate exhibition recently. Attendance was 230,000, but only 32 homes were sold. These numbers are an improvement from 2013 and 2012. One state-owned developer said that price cuts cannot cure the market. The government must step in and ease buying restrictions, ease borrowing limitations, reduce bank reserve requirements, allow people to borrow for second and third homes, etc., in order to instill confidence in the market. The developer also said the media and experts were giving one sided reports, causing more chaos in the market, while buyers are more strongly adopting the wait and see attitude. He said buyers have no bottom line, if you cut 10%, they want 15%, if you cut 15% they want 20%. His firm has used price cuts of 10% and he hasn’t sold a home in 3 months. He said with government support, they can survive, but small private firms are not so confident.

A real estate agent said that even if sales pick up, price cuts will kill the firm. He said the government is more nervous than the industry because if land sales stop, they might not even be able to pay the wages of government workers. He expects, and hopes, the government will do something to rescue the market.

Dr. Ye Hongwei, Assistant Director of the Real Estate Investment Research Center, Zhejiang University, said the national government would not ease policy. He said there are really only two areas that might ease: buying restrictions and credit limits. The credit limits are set at the central government level and are unlikely to ease. The buying restrictions are set locally, but so far only small cities have enacted these policies. Wenzhou has seen prices fall for 30 straight months and there has been no real easing (aside from a small change last August). He said easing in Hangzhou is unlikely: it is a sensitive real estate market and a bellwether for the national real estate market.

The ultimate cause of the problem was excessive credit growth. The subsequent steps were all aimed at dealing with that policy mistake. Similarly, after 2008 the government encouraged people to buy cars to boost economic growth, then in 2012 everyone is complaining about congestion and rising pollution levels in Beijing. Now this is the headline: China to scrap millions of cars in anti-pollution push. The bill for 5 years of malinvestment is coming due.



Houses and Holes
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  1. “”…The bill for 5 years of malinvestment is coming due…”

    Ain’t that the truth.

    No point cranking out products that most of the market cannot afford to buy.

    No doubt that, in time, all those over priced apartments built on the fumes of a debt binge will eventually find occupants in a land of 1.4B people, but that is then and this is now.

    And there is a lot of bad debts in between.

    On the bright side we are likely to get an answer to that age old question – can authoritarian states without the rule of law manage bankruptcy and the liquidation of bad debts better than democracies governed by rule of law (or something approx to it)

  2. A China hard landing would plunge the world into another depression. While it may be good from a utilitarian economist perspective to flush out all the bad debt and malinvestments, I’m genuinely worried about the geo-political and societal impacts of universal poor economies.

    Ahhhh if only I was a boomer 😉

    • Ahhhh if only I was a boomer 😉

      Why? You will probably come out the other side unscathed. All those holding property and counting their millions before they hatch, dunno…

  3. Charles Ponzi

    “….a new policy that will seek to massage the housing data, presumably in an attempt to shift market sentiment.”

    I wonder if the same thing is happening with Australian housing data? The published data doesn’t match what I’m seeing on the streets of Adelaide.

    • I’m gunna go with – are you kidding ?

      Here is a very, very good example. USED to scrape housing data from the majors and provide historical data on house prices and hence you could see price falls.

      This, along with at least 5 others I know of, have been over taken and the data is now utterly irrelevant or downright not available.

      The market coercion and manipulation is astonishing.

      I genuinely feel that if were to spend time on this issue we would see some real change because it is simply THAT CORRUPT and no one is saying anything. The slightest whisper would send shock waves.

      The discussion around the FIRB and foreign purchases last year roused a great deal of interest.

      Focusing on the deliberate market distortions occurring in Australian real estate would definitely create a stir.

      If people are being investigated for sending out false press releases regarding coal seam gas – how is that entire quadrants of the media have been co-opted and are putting out not merely misleading information – but outright lies.

  4. So if Chinese Government does intervene, presumably this pushes out further any day of reckoning here.

      • But they are going to intervene at some point aren’t they?

        I may not be a Chinese expert and they may have a different philosophy (and economic circumstances) to the West, but can kicking seems to go to the heart of human government — regardless off governmental structure.

        The question is whether they will be able to contain the economy in the same way they have traditional contained democratic urges.

      • Yes, but by bit. But remember that this is a structural not cyclical adjustment. They don;t want reinflation they want new sources of growth.

        Best case in the medium term is a fixed asset plateau.

  5. Sorry to be a pedant.. the title should be “Minerals Council of Australia await property bailout with bated breath”. Apparently, a container-full of Grange bottles is on its way to politburo members to speed up the bailout.

  6. So, will the central government
    1. fund new purchasers of recently built dwellings so the developers get out (Australia),
    2. will it fund the banks to take the write offs (US),
    3. will it let all private equity holders go to the wall and nationalise everything that fails if it is too big too fail (UK),
    4. will it just have zombie large companies and banks and let the minnows including local governments go under (Japan)?

    So many choices for which there are precedents!