Where will the next Chinese bubble be?

Cross posted from Investing in Chinese Stocks.

With the January surge in liquidity looming in the distance, the Chinese real estate market is hitting an important turning point.

iFeng: 2019年楼市或加速分化 楼市成交整体走低

According to the statistics of the Krui Real Estate Research Center, during the Spring Festival, the data of more than 40 key monitoring cities showed that the supply decreased by 29% year-on-year, and the supply was insufficient. Researcher Shen Xiaoling of the agency pointed out that during the Spring Festival, the intensity of discounts and marketing efforts have declined compared to last year. The developers’ own sales expectations have also been lowered. There is no hope that the home buyers will drive the “purchase of house purchases” as in previous years. There is not much special promotion for the marketing plan of the Spring Festival market. The “Spring Festival is not fighting” of some real estate enterprises only maintains basic operations, and has not launched specific profit-making activities.

…Since the second half of 2018, real estate enterprises have accelerated their inventory sales in order to improve sales performance, and special room promotion activities have increased significantly until the Spring Festival of 2019. Judging from the strength of special room discounts, it is mostly concentrated between 8.2-9.8 folds [2-18% discount], which is a significant drop from the 6.4-8.5 fold [15-36% discount] of last year. Judging from the way of giving away gifts in kind, in 2018, some real estates have sold high-value physical objects such as BMW cars. However, during the Spring Festival of 2019, gifts were mostly low-value items such as home appliances and mobile phones.Analysts see the top-tier cities outperforming moving forward:

In Shen’s view, this also shows that the property market in first-tier cities and some second-tier cities has begun to cool down in 2017. The volume of such cities has been consolidating for two years and above. In 2019, there is limited space for decline, especially in Xiamen and Beijing. Shanghai is expected to take the lead in stabilizing and even rebounding; while some weak second-tier cities and third- and fourth-tier cities have risen for two consecutive years, and the downside risk is greater in the next year or two. 

It is worth mentioning that from the perspective of the whole year of 2018, the trend of large-scale and industry concentration between housing enterprises has become more apparent. At the same time, with the deepening of regulation and control, the financial risks brought by the slowdown in sales of enterprises and the difficulty of financing have gradually emerged, and the overall risks of the industry have accumulated. In this context, benchmarking housing enterprises are concentrated in the first- and second-tier mainstream cities for land reserve layout.Analysts see downward pressures in 2019:

For the third- and fourth-tier cities, Yang Kewei, a researcher at the Cree Real Estate Research Center, further analyzed that “the tides of returning to the hometown and buying real estate in the third- and fourth-tier cities during the Spring Festival of 2019 were obviously eclipsed, and the volume of Xuzhou and Huai’an was lower than that of the year-on-year, Shaoguan and Jinjiang. On the one hand, the prices of third- and fourth-tier cities have risen to a stage high, and the purchasing power of the market is inevitably overdrawn. On the other hand, since the fourth quarter of last year, the real estate market in the third- and fourth-tier cities has been adjusted and market transactions have been completed. Significantly slowing down. Under this background, it is normal for the third- and fourth-tier cities to show no obvious Spring Festival return home.” 

Yang Kewei said, “The downward pressure on the real estate market in 2019 should not be underestimated. The growth rate of the sales area of ​​commercial housing in the country has entered a negative growth rate. It is a high probability event. The volume of first- and second-tier cities may remain stable under the policy slowdown, but the three-fourth Line cities are expected to face greater adjustment pressure.”Whatever the Chinese government does with monetary and fiscal stimulus, demographics will ensure that the real estate market starts differentiating as it has in developed nations. If the January liquidity boom is a trend instead of a one-off burst of stimulus financing, the likely spots for a renewed housing bubble are the first- and second-tier cities.

OK, so we know that China hit some kind of juice in January:

Li Keqiang is not happy:

“The increase in total social financing appears rather large on the surface, but if one analyses in detail, a large part of this rise was bill financing and short-term lending. Not only does this potentially create ‘arbitrage’ and ’empty cycling’ of funds, but it may also bring new potential risks,” he said.

Most of the surge went not into local governments or households but businesses. Where will it inflate a new bubble then (as it always does)? Perhaps stocks for starters which would make Li look pretty stupid after the 2015 episode.

The critical question for Australia is will it also again be realty and construction? The above discussion suggests partly. But where matters a great deal too. The last credit surge trickled down into lower tier city building but that began to retrace hard into the end of 2018:

Starts will follow sales:

And given lower tier cities constitute roughly three-quarters of the market, any resurgence in real estate construction that is limited to top tiers could still see falling commodity demand.

Watch this space.

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