China – light at the end of the tunnel?
The stench of deflation continues to waft around Asia’s largest economy. Jefferies’ Chris Wood recently noted that nominal GDP growth has lagged real GDP growth for the past five quarters to June. Retail sales rose an anaemic 2.7% in July while year to date retail sales rose just 3.5%. Bank loan growth fell below 10% year on year in February for the first time in living memory, July bank loan growth was 8.3% over the same period. China’s trade surplus averaged $446bn between 2020 and 2023, the OECD forecast for 2024 is $316bn. All this data suggest that the Chinese consumer is on strike.
An article in the China Project in late 2022 estimated that around two thirds of the average Chinese household wealth was tied up in property while an article in Time Magazine last October estimated that some 50m completed properties are empty. This is not new news, but it is fundamental to understanding why Chinese households are reluctant to loosen the purse strings while they are unsure of the ‘true’ value of their most significant asset.
The Chinese authorities have long battled market forces in the residential property market, most of the time trying to suppress rising prices but, more recently, trying to prop them up. A far, far harder, if not impossible, proposition. Last year existing home sales overtook those of new properties for the first time. Government efforts to influence or control property prices focus exclusively on new builds, now the smaller part of the overall market.
According to Centaline Group the price of second-hand homes in Shenzhen, once China’s least affordable city, have fallen 37% from a peak in May 2021 while they have fallen by some 27% in Beijing, Shanghai and Guangzhou. Nationwide, it is estimated that new home values have declined about 7.2% from June 2021 compared to the 13.6% drop seen in existing home prices according to Bloomberg.
Although no specific policy changes have been announced, it appears that the penny has dropped at a very high level. In May, Beijing’s Oak Bay development by state-backed China Resources Land cut its asking price for some units by 18%. Two nearby projects joined in the action with China Blossoms offering selective units 31% below Government guided prices.
Hurrah – the market for new properties can now start to clear (as the second hand market has been doing for several years). To clarify we still consider the sector uninvestable. This will not happen overnight but our point is that once households become confident of the real market value of their properties, they may start to loosen the purse strings.
If you would like to receive The Daily Update to your inbox, please email markets@epicip.com or click the link below.