London Telegraph April 26, 2012 China’s property boom has peaked, forever
By _Ambrose Evans-Pritchard_ (http://blogs.telegraph.co.uk/finance/author/ambroseevans-pritchard/) Here is some food for thought, if you are a China "take-over-the-world" bull. I have just been listening to a talk on the Chinese housing market by Xianfang Ren, Beijing analyst for IHS Global Insight. Land sales make up 30pc of total tax revenue for the central government and 70pc for local government. (For those of us who watched the Irish state balloon on the back of property taxes – when they had a fat budget surplus – this has a familiar ring.) Construction makes up 10pc of total jobs, and a further 20pc indirectly in cement, steel, metallurgy etc. The government is building 36m homes for the poor, but that will start to run down in two years or so. Residential investment typically peaks at 8pc to 9pc of GDP for emerging nations during their catch-up growth spurts. It is already 12pc in China. Japan’s ratio peaked in 1973, long before the property price bubble burst. China has almost certainly peaked too on this crucial measure. The minimum down-payment rate on mortgages is 30pc, so leverage is in theory low. (How this can be the case when the IMF says that the house price to incomes ratio is 16 to 18 times in the Eastern cities of Beijing, Tinajing, Shanghai, Shenzhen, and Guangzhou has long been a mystery). "At first sight China looks fine. Unfortunately, there is a big problem of misclassification of loans. The financial system has much larger exposure to real estate than appears, and the weak links are the real estate trusts and non-bank lending. The smaller developers are cash-flow constrained and will find it hard to roll over debts. Any defaults will have to be recognised immediately." This may be happening already, since housing sales slumped 25pc in the first quarter. Meanwhile, the demographic crunch hit last year. China’s dependency ratio – ie children plus elderly in proportion to those of working age – touched bottom at 28pc and has now begun a relentless climb that will get worse every year for decades. (The ageing crisis is not yet as bad as Japan at the onset of the Lost Decade in the early 1990s. The old-age dependency ratio is 11pc compared to 18pc in Japan in the early 1990s). The urbanisation rate has just passed the "inflection point" of 50pc when growth in developing economies starts to slow sharply. A week ago I heard a talk at the ChunQiu Institute in London by Nobel laureate Edmund Phelps (one of the truly great Nobel economists who first debunked "Keynesian" misuse of the growth/unemployment trade-off or Phillips Curve and has devoted the last part of his academic life to trying to understand China). His view is that China has already reached the point where it can no longer offset soaring wage costs with productivity gains imported through Western technology. It has hit the time-honoured wall. Diminishing returns are setting in, and there lies the "middle-income trap" that ensnares most challengers. He expects productivity growth to converge with US levels within ten years, but at a much lower per capita. Whether China has the free-thinking, inventive culture to grasp the prize in the next historical phase is far from clear. Be that as it may, Xianfang Ren said China has the means to bail out the banking system and property market in this cycle, and will use them if need be. "Housing is way too important to allow a hard landing." These include deposits (170pc of GDP), government revenues (30pc), the assets of state behemoths (75pc), foreign reserves (50pc) of GDP – I don’t agree on this last point since the FX reserves cannot be repatriated without a big currency rise and a shock for exporters. It would amount to monetary tightening. This could all go wrong if there is a "perfect storm", if China is hit by an external shock and at the same time makes big policy errors like Japan at the end of its bubble when it raised interest rates 400 basis points and imposed a land tax at the wrong moment. "We don’t think there will necessarily be a housing bust but the chance of another boom is very low." Indeed. Much China debate in the West is hijacked by ultra-bulls or ultra-bears. Xianfang Ren actually knows what she is talking about so I pass on her thoughts. There again, after the Bo Xilai saga, can anybody really say they know what China’s political landscape will look like in 10 years? -- Centroids: The Center of the Radical Centrist Community <[email protected]> Google Group: http://groups.google.com/group/RadicalCentrism Radical Centrism website and blog: http://RadicalCentrism.org
