International | Apr 28 2010
By Greg Peel
China's GDP growth recently registered 11.9% in the March quarter despite Premier Wen Jiabao having stated his desire for only 8% growth in the wake of the December quarter's result. Beijing had applied a couple of tightening measures in the interim, centred around bank capital requirements, but implications from the Chinese Congress meeting in March were that tightening measures need not be overly rapid.
Indeed, while the world was expecting China to now move quickly on currency revaluation the talk at the meeting was that no such move was on the horizon. Wen Jiabao did specifically voice, nevertheless, his alarm at the Chinese property bubble, and the Shanghai stock index is now down 11% in 2010 – a performance worse than any other major index.
Over the weekend, the attitude changed on tightening measures, if not specifically a renminbi appreciation. Bank capital adequacy ratios have been raised from 8% to 10%. Credit provisions have been raised to at least 150% of bad loans. Second home buyers now require a 50% deposit rather than 40% and first home buyers 30% rather than 20% for homes over 90sqm. Mortgage rates for second home buyers are now 110% of benchmark, up from 80%. The minimum capital requirement for developers taking on real estate projects has been raised, and local governments have been banned from guaranteeing their finance companies' loans.
“Until recently, we thought the government would act gingerly in order to avoid a repeat of 2008, when an overly aggressive property crackdown led to a broad-based economic slowdown,” noted the analysts at GaveKal in a research release yesterday. “And a take-it-easy approach certainly seemed to be in the cards as recently as the National People's Congress in March. But now it appears that policy has shifted to an all-out campaign to curb speculation and promote affordable housing.”
GaveKal's earlier views were outlined in Should We Fear The Chinese Property Bubble? Should we now be fearing a Chinese stock market collapse?
These are the harshest property tightening measures in China's history. And GaveKal notes there's more to come, including a suggested property consumption tax along with further constraints on developers. It's almost as if Beijing is deliberately trying to create a property market crash.
But then why not? As GaveKal explained in the article referenced above, given unique circumstances in China, either the property market could continue bubbling for three or more years yet without danger, or if there were a crash, no one much would be hurt. Certainly not the general public, which would dearly love to see a crash to bring residential property back to an affordable level. It would not be a repeat of Japan in 1990.
The analysts at Danske Bank agree. In a report released last night, Danske suggests the balance of low household debt-to-GDP in China and the strength of China's economic growth means China simply is not another Japan. Nor is it even a Spain or Ireland, UK or US.
Danske notes that it currently costs an average of around 8x household income to buy a house in China, and up to 14x in Beijing or Shanghai. Developed economies consider 4x to be the norm, which is where the US has now fallen back to with the UK at 5x. Australia is 7x. But the analysts also note real incomes in China have tripled since 1997 while real house prices have only risen 50%, meaning there is a wider trend toward affordability, not away from it. From 1997 to 2007, houses prices in the UK, Spain and Ireland rose 100%.
Danske further notes credit growth in China was 30% in 2009 and debt leverage (relative to GDP) rose 20 percentage points to 120%. But equivalent debt leverage in the UK, Spain and Ireland rose around 100 percentage points to numbers over 200%, with the US around 160%. China is more on par with Germany.
Some more numbers: China's household debt is less than 16% of GDP compared to 70% in Japan and 100% in the US and UK.
This suggests to Danske that the Chinese property bubble is not debt-driven, as most dangerous bubbles are, but liquidity-driven through fiscal stimulus. Danske thus echoes GaveKal's earlier conclusion that a property crash would not hurt households at all, only state enterprises. And state enterprises don't need to “mark to market” and thus show any loss on their property lending or investment.
Danske does warn, however, that a more dangerous bubble will emerge if Beijing lets accommodative policy go on for too long. And it may not just be a case of revaluing the renminbi. This did not stop funds inflows in 2004-08.
But clearly Beijing is now stepping up its tightening agenda. Why the sudden change?
GaveKal offers two reasons. Firstly, the runaway 11.9% growth in the March quarter means Beijing can be more comfortable about trying to cool the economy without killing it. Export numbers jumped substantially in March taking pressure off fears for a double-dip recession. Indeed, overheating is the problem. Beijing can happily let the property market crash back to something more reasonable.
Secondly, GaveKal had previously noted that over 2003-09 in China mortgage debt totalled only 34% of net houses sold. That's as if everyone had put down a 66% deposit. But suddenly in the March quarter, the numbers have swapped. Debt is now 66% of value. This means that since the end of 2009 that liquidity-driven bubble of which Danske has spoken is now trending towards more of a debt-driven bubble.
What this means, however, is that Beijing's specific moves to slow the economy through property market tightening will be successful. The bubble will be pricked, says GaveKal.
So where does that leave the Chinese stock market?
The Chinese stock market, notes GaveKal, is a very momentum-driven market. In other words it suffers big swings and round-abouts, more so than in Western markets where option hedging, shorting, and general contrarian plays often stifle momentum quickly. Thus the Chinese pullback underway could go on for a while yet.
“But this should not be seen as a sign the Chinese economy is set to implode,” says GaveKal.
Fears over Chinese tightening measures have lingered around Wall Street and Bridge Street for some time now even as Europe has hogged the spotlight. How would the world survive right now if the Chinese economy began to back-pedal once more? Yet still new stock index highs have been marked this month.
Today's action is a much needed venting of complacency that had built up as cocky investors tried to convince themselves that Europe in particular was all just a storm in a tea cup and was being looked after by the EU and IMF. The risk-hungry simply needed to pull their heads in, and we may yet get the decent pullback the market needs.
But it is in global investors' longer term interests that the Chinese economy remains on a steady upward path, and not a wild ride of boom and bust, even if its share market flies all over the place. That's what Beijing is trying to achieve.
