China property bubble hisses air

“China’s real-estate market seems to have reached a turning point,” says Zhu Haibin of JP Morgan. In June, prices fell in 55 of the largest 70 cities, compared to 35 in May. And in July, prices dropped in 64 cities, the worst monthly reading since records began in 2005.

Developers are retreating from new investments and floor space sold in July fell sharply from June.

It’s little wonder – China’s property bubble has been off the scale. Land prices have gone up fivefold since 2008. Shanghai’s house-price-to-income ratio has hit an incredible 22. In just two years – 2010 and 2011 – China produced more cement than America did in the entire 20th century.

Overall credit in the economy soared from 140% of GDP to 250% this year, with much of this stemming from mortgages. Nine in ten urban households already own at least one house.

Grandiose projects included an attempt to create a financial district modelled on Manhattan – complete with a Rockefeller Center and Twin Towers – in a wasteland 150km from Beijing.

So what caused the turnaround? “China has simply built too much,” says the FT’s Jamil Anderlini. Total floor space under construction is enough to meet four years of demand. In the worst-hit provinces, there is seven years’ worth of supply.

Developers are supplying 15 million new units a year, even though there is enough stock for every household to own its own house. No wonder ‘ghost towns’ have proliferated.

The government is trying to engineer a soft landing by easing restrictions on property sales and encouraging banks to lend. Its efforts haven’t been very successful so far, notes the FT. The banks have little appetite for more lending – according to Fathom Consulting, non-performing loans have hit 17% of GDP, up from 8% in 2008.

Yet even if the government doesn’t find a way to deflate the credit bubble gently, a Lehman-style collapse seems unlikely. The state owns the banks and can force them to keep lending.

Several years of subdued growth, as bad loans are shuffled around until the banks gradually work through them with state help, seems the likely scenario.

In any case, the stock market looks cheap enough on a cyclically adjusted price/earnings ratio of 11.8 to be worth a punt on China’s long-term prospects. One option is the
JP Morgan Chinese Investment Trust (LSE: JMC) on a discount to net asset value of 10.6%.

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