China property bubble hisses air

China's property market has reached a turning point. But don't expect a Lehman-style collapse.

"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 finda 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 ratioof 11.8 to be worth a punt on China's long-term prospects. One option is theJP Morgan Chinese Investment Trust (LSE: JMC) on a discount to net asset value of 10.6%.

Recommended

Four of the best investment trusts for investing in emerging markets
Investment trusts

Four of the best investment trusts for investing in emerging markets

Investors need to tread very carefully in this risky sector. Here are the best ways to approach it
22 Mar 2021
Storm brews in emerging markets as investors pull cash out
Emerging markets

Storm brews in emerging markets as investors pull cash out

Foreign investors have begun to pull cash out of emerging markets as they begin to look less attractive when compared to the rising return from holdin…
12 Mar 2021
I wish I knew what an emerging market was, but I’m too embarrassed to ask
Too embarrassed to ask

I wish I knew what an emerging market was, but I’m too embarrassed to ask

This week's “too embarrassed to ask” explains what emerging markets are, and why you might want to invest in them.
9 Sep 2020
What China’s new red dawn means for Hong Kong
Chinese economy

What China’s new red dawn means for Hong Kong

China has once again moved to tighten its control over the former British territory and global financial centre. What will remain of the old Hong Kong…
10 Apr 2021

Most Popular

The bitcoin bubble will burst: here’s how to play it
Bitcoin

The bitcoin bubble will burst: here’s how to play it

The cryptocurrency’s price has soared far beyond its fundamentals, says Matthew Partridge. Here, he looks at how to short bitcoin.
12 Apr 2021
Central banks are rushing to build digital currencies. What are they, and what do they mean for you?
Bitcoin

Central banks are rushing to build digital currencies. What are they, and what do they mean for you?

As bitcoin continues to soar in value, many of the world’s central banks are looking to emulate it by issuing their own digital currencies. But centra…
8 Apr 2021
Four investment trusts for income investors to buy now
Investment trusts

Four investment trusts for income investors to buy now

Some high-yielding listed lending funds have come through the crisis with flying colours. David Stevenson picks four of the best.
12 Apr 2021