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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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%.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.
After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.
His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.
Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.
-
Will a Santa Rally bring festive cheer to investor portfolios this year?
Investors will be hoping for a seasonal stock market boost in December
By Marc Shoffman Published
-
ChatGPT turns two: how has it impacted markets?
Two years on from ChatGPT’s explosive launch into the public sphere, we assess the impact that it has had on stock markets and the world of technology
By Dan McEvoy Published