International | Oct 13 2014
– Chinese property price decline accelerating
– Comparisons made to Japanese crash of '91
– Today's China more in line with 1970s Japan
– Beijing on top of policy management
By Greg Peel
China’s housing investment represents 25% of the country’s total fixed investment, note ANZ Bank’s China economists, and is closely associated with many industries as well as the banking sector. Those “many industries” include building materials such as steel (thus iron ore and coal), copper and cement, which is why Australia’s export economy is so closely linked to China’s property market.
In August, a 70-city index of Chinese property prices declined by 1.1%, following declines of 0.9% in July and 0.5% in June. Clearly, falling property prices are translating through to a drag on China’s economic growth. Many in the market are expressing their concern that China is shaping up to repeat the Japanese property collapse of the 1990s, which resulted in Japan’s “lost decade” of entrenched deflation from which it has not since effectively recovered.
Obviously the ramifications of a Chinese property collapse would be dire for the Australian economy. ANZ believes concerns over a Chinese property bust are legitimate, but the economists also believe the concern is overstated.
Fear of a Chinese property market collapse has been hanging over global financial markets since not long after the GFC. Fears were particularly heightened in 2011-12 when last Chinese property prices went into notable decline, and ANZ believes this current bout of depreciation may well last longer. Hence the fear a Japanese-style property bust is imminent. However, ANZ also points out that while the 1990s property bust in Japan is the event the market most clearly remembers, little reference is ever made to Japan’s property market correction of 1974-76.
Comparing the emerging economy of China now with the mature Japanese economy of 1990 makes less sense to ANZ than a comparison with the emerging Japanese economy of the 1970s.
After World War II ended, Japan, just as was the case with developed economies, experienced a baby boom. When these babies grew up to enter the workforce and buy houses, property demand grew alongside mortgage credit expansion and inflation, creating a strong rally in property prices through 1968-73. The then Japanese government feared a bubble was forming and responded with a levy on land ownership and tighter monetary policy, which saw the cash rate rise from 4.25% in mid-1972 to 9.0% by end-1973. It worked: Japanese property prices duly retreated for the next three years.
The next rally in property prices lasted until 1991 and this time the government was too slow to see the cliff approaching. By the time monetary policy action was taken, it was too late. This writer recalls an oft referred to statistic of the day that at the peak of the bubble, the grounds of the Emperor’s Palace in the centre of Tokyo were effectively valued at more than the property of the entire state of California. The bubble then burst, the Japanese stock market followed suit, and the “Japanese Miracle” was over.
In 1991, Japan’s GDP per capita equated to 80% of the US GDP per capita of the day, notes ANZ, implying Japan was very much an “emerged”, or developed, economy. In 2013, China’s GDP per capita equated to only 22% of the US equivalent, implying China is still “emerging”. China’s economic emergence is often compared to Japan’s economic emergence of the sixties and seventies. In 1971, Japan’s GDP per capita equated to 22% of the US equivalent.
In 1970, 72% of Japan’s population was classified as “urban”. On last count, 53% of China’s population is considered “urban”, which is a level last seen in Japan in 1955. Currently, Japan’s problem is an ageing population leading to population contraction. China’s population continues to grow at a trend rate of 0.5% per annum and given the potential relaxation of the One Child policy, that rate could increase.
The policies adopted by Japan in 1973 to deflate the property bubble were intentional, and the consequences were as planned. The 1991 property crash occurred because policymakers were asleep at the wheel. The current downturn in Chinese property prices is also due to intentional government policy, and the consequences no surprise. Beijing is not asleep at the wheel. Indeed, initial property purchase limits were imposed in China in 2011, and the Chinese central bank has maintained a high interest rate environment in the interim. There is plenty of room to move to the downside were the China’s property price retreat to get out of hand.
Add up all of the above and the ANZ economists are making the case that China today is not Japan in 1991. China today is far more closely related to Japan in 1973. Moreover, the Japanese experience of 1991 provides China with a “what not to do” template that Beijing no doubt retains as a policy guide.
To that end, policy levers are already being pulled to orchestrate a “soft landing” rather than a feared Japanese-style “hard landing”. Many local governments have recently begun to relax property purchase limits and the central bank has adjusted mortgage lending policies to promote first-home ownership. In ANZ’s view, Beijing appears to have realised the importance of wisely managing property risks to avoid a hard landing scenario.
The economists believe the government can succeed in de-leveraging the Chinese economy in an orderly manner. Monetary policy easing can help facilitate this process. This will serve to mitigate the financial and macroeconomic risks of a downturn in the real estate sector.
During recent tours to Chinese provinces, Deutsche Bank analysts found that even before the latest central bank policy relaxation, developers willing to cut prices were already able to achieve good sales. The subsequent adjustment in first home-buyer mortgage policy should further boost market sentiment, they suggest. Deutsche is expecting a strong recovery in sales volumes after the recent Golden Week break.
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