We have been following the problems in the Chinese property market since last year. As I have pointed out many times there has been a Chinese spin but many of the issues are common with problems us western capitalist imperialists have experience. The Chinese spin starts with the fact that this is a big deal economically with more than a quarter of economic output or GDP depending on this sector. Problems always get worse when we see this.
BEIJING, Sept 5 (Reuters) – Woes in China’s residential property market are expected to deepen this year as homebuyers remain cautious, with economists now expecting home prices to fall in 2022 and betting on a faster drop in property sales than previously forecast.
It is not that they falls are expected to be large ( although they may be under pressure to keep the number low) but the change in psychology here.
New home prices are expected to fall 1.4% in 2022, according to a Reuters survey of more than 10 analysts and economists polled between Aug. 29 and Sept. 2. In the May quarterly survey, analysts had expected prices to remain unchanged for the year.
The previous scenario relied on everybody singing along with Hot Chocolate.
Everyone’s a winner, baby, that’s no lie (yes, no lie)You never fail to satisfy (satisfy)
People buy property off-plan helping the developers borrow more and in a bull market it is juiced by prices rising so everyone’s a winner. Or for once the can being kicked into a better future. But now prices are falling and some developments have not progressed as expected.
The Banks
A property crisis always involves the banks as we let the Financial Times take up the story.
China’s biggest four banks have been hit by a more than 50 per cent increase in overdue loans from the property sector over the past year, as the real estate market’s liquidity crunch spills into the financial sector.
China’s top lenders — the Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China and Bank of China — last week reported combined overdue property loans of Rmb136.6bn ($20bn) at the end of June, up from Rmb90bn at the same time last year.
I would imagine that there has also been pressure not to declare too large a number here as well. The mortgage book is not looking the banking asset that it previously did.
“We see multiyear structural [return on equity] decline as banks retreat from the property sector amid stalled projects, mortgage boycotts and heightened regulations,” Macquarie analyst Dexter Hsu wrote in a note to clients.
Also we see the Chinese version of The Precious! The Precious!
China’s “Big Four’‘ lenders are systemically important institutions and the backbone of China’s financial sector. They are among the world’s biggest banks, holding about 36 per cent of the country’s deposits and issuing a third of its loans. Beijing depends on the groups to stabilise the country’s economy and trusts them to faithfully implement monetary policies.
Remember when we were all supposed to be chopping at the banking sectors to stop the too big to fail issue? That seems to have morphed into “Beijing depends on the groups”. In truth we have not done much better in the west but the particular issue of the property boom and bust is hitting China first.
Have the Chinese authorities dictated this bit to the FT?
The size and relatively stable health of the Big Four banks has given Chinese authorities confidence as they try to orchestrate a soft landing for failing companies in the property sector, which accounts for about 30 per cent of national gross domestic product.
As we find so frequently the numbers are never quite what we have been told as we note this.
However, Hsu said that while banks’ loans to developers accounted for 4 per cent to 9 per cent of their total loans, it will probably become “the major source” of new non-performing loans in the next two years, driving up credit costs for the banks.
“We believe the real exposure to developers could be much bigger than reported because they extended credits to the developers via proprietary investments and off-balance-sheet credits like wealth management products, trust products, private funds and private bonds,” he added.
Maybe the FT has sneaked in a sense of humour with the bit highlighted by me below.
The underlying risks for mortgages, once considered among the banks’ safest assets, are rising too, partially because of the increasing pace of defaults by homebuyers, including a country-wide payments boycott on unfinished homes.
As to the worst hit we have these two.
According to the exchange filings, Agricultural Bank of China and China Construction Bank were the worst affected, suffering increases in bad loans to the sector of 152 per cent and 97 per cent from a year ago, respectively.
At CCB, overdue mortgages that were boycott-related reached Rmb1.14bn at the end of July, said Li Jun, vice-president of the bank. AgBank said it was facing Rmb1.23bn in overdue loans affected by the boycott, nearly double its previous estimate three months ago.
Nearly doubling in three months?
Exporting
Reuters major on export growth slowing but they did grow as did the surplus.
Exports rose 7.1% in August from a year earlier, slowing from an 18.0% gain in July and marking the first slowdown since April, official data showed on Wednesday, well below analysts’ expectations for a 12.8% increase.
Inbound shipments rose just 0.3% in August from 2.3% in the month prior, well below a forecast 1.1% increase.
So we have what economics 101 would describe as export-led growth. The problem is that it is not really like that because the import issue shows an underlying problem. Consumption has struggled and the housing sector will add to its problems and the Covid lock downs are no doubt there too. Also there is the issue of not only an unbalanced Chinese economy but an increasingly unbalanced world one.
With energy intensive industries in the West cutting production we may see more of this which of course is the opposite of the political rhetoric we have seen.
Comment
The first issue is the impact on the Chinese economy where we see the property sector and banking sector being increasingly pulled downwards. That poses a question for consumption in a country which is also showing a feature of the Lost Decade in Japan.
Citizens aged 60 or over account for more than a fifth of residents in 13 of China’s 31 provincial-level jurisdictions, highlighting growing strain on the country’s struggling pension fund, but possible opportunities for the silver economy. ( South China Morning Post)
Also if we note Japan we see that it has seen quite a currency devaluation compared to China. We have a Yen which has passed 144 today but a Yuan which did not pass 7. One Yuan buys 20.7 Yen now which is up 21% on a year ago. Wasn’t China supposed to be the currency devaluer?
This has two influences of which the first is quite a revaluation between the two main Pacific currencies. The next is that China may be keeping the Yuan strong to prevent yet another problem for the property sector via its dollar borrowing.