Chinese property is in a “bubble of epic proportions”, says Matthew Brooker on Bloomberg. On some measures it “overshadows the pre-global financial crisis” boom in US housing valuations. In Shenzhen a flat costs 43.5 times the average annual salary, three times the figure for London. The market “stands comparison with the Japanese real estate bubble of the 1980s”, which inflicted a “lost decade” on the economy after it burst in 1990.
Turmoil at Evergrande
This week has brought new turmoil at Chinese property developer Evergrande. The group has been struggling to service a $300bn debt pile. Once “the world’s most valuable real-estate group”, today Evergrande is “the world’s most indebted property developer”, says Ian Verrender on abc.net.au. It is trying to sell assets to raise cash, but has warned that it could default should those efforts fall short. The company’s debt sells for less than 30 cents on the dollar. “Contractors are lining up for payment” while “tens of thousands of hopeful apartment owners are fretting” that their deposits are about to “evaporate”. Evergrande’s shares have fallen by 79% since the start of the year.
The property market has been a “key driver of economic growth” in China ever since it liberalised its economy, says Edward Witte in The Diplomat. “Owning property... is seen as a benchmark one must reach before getting married and starting a family.” The result? An estimated 70% of the country’s household wealth is in bricks and mortar. On the broadest definition, the property sector accounts for “a quarter of the Chinese economy”, says Ambrose Evans-Pritchard in The Daily Telegraph. That is “three times the relative weighting of America’s extreme bubble in 2007”. Half the world’s cranes are in China. The Communist Party has concluded that soaring prices are “triply corrosive”. Expensive housing raises financial risk, worsens inequality and is stopping families from having children.
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
The clampdown cycle
Authorities have clamped down, says The Economist. Last year, regulators imposed caps on how much property debt banks can hold and demanded that developers adhere to rules requiring them to keep debt under control. The results are already apparent: “Sales of new homes in 30 cities… fell by 23%”, year-on-year, in August.
Some have drawn parallels between Evergrande and the 2008 meltdown at Lehman Brothers, says Evans-Pritchard. But the comparison looks implausible because “the state retains iron control over banks”. Regulators appear to instead be “orchestrating a disguised soft-landing” for Evergrande. Chinese property regulation has historically been “stop-start”, says Brooker. Authorities try to restrain speculation, but whenever the economy weakens “the money taps open… the urgency of [dampening] home prices is temporarily forgotten”. Then the cycle repeats. Some think the latest clampdown will go further. But that would risk a “debt crisis” and a prolonged recession. The property sector “is simply too big, too overvalued and too important to the economy” to be tamed.
-
Why Trustpilot is a stock to watch for e-commerce exposureTrustpilot has built a defensible position in one of the most critical areas of the internet: the infrastructure of trust, says Jamie Ward
-
Tetragon Financial: An investment trust with stellar returnsTetragon Financial has performed very well, but it won't appeal to most investors – there are clear reasons for the huge discount, says Rupert Hargreaves
-
How to capitalise on the pessimism around Britain's stock marketOpinion There was little in the Budget to prop up Britain's stock market, but opportunities are hiding in plain sight. Investors should take advantage while they can
-
London claims victory in the Brexit warsOpinion JPMorgan Chase's decision to build a new headquarters in London is a huge vote of confidence and a sign that the City will remain Europe's key financial hub
-
The consequences of the Autumn Budget – and what it means for the UK economyOpinion A directionless and floundering government has ducked the hard choices at the Autumn Budget, says Simon Wilson
-
Reinventing the high street – how to invest in the retailers driving the changeThe high street brands that can make shopping and leisure an enjoyable experience will thrive, says Maryam Cockar
-
The global defence boom has moved beyond Europe – here’s how to profitOpinion Tom Bailey, head of research for the Future of Defence Indo-Pac ex-China UCITS ETF, picks three defence stocks where he'd put his money
-
Profit from a return to the office with WorkspaceWorkspace is an unloved play on the real estate investment trust sector as demand for flexible office space rises
-
An “existential crisis” for investment trusts? We’ve heard it all before in the 70sOpinion Those fearing for the future of investment trusts should remember what happened 50 years ago, says Max King
-
No peace dividend in Trump's Ukraine planOpinion An end to fighting in Ukraine will hurt defence shares in the short term, but the boom is likely to continue given US isolationism, says Matthew Lynn
