The China housing crisis builds up steam

This morning has brought news of something which would bring a chill to the heart of any central banker. It comes from China as we note this from Reuters.

 So far this year, the Shanghai stock index is down 14 percent, the CSI300 has fallen 12.4 percent while China’s H-share index listed in Hong Kong is down 4.8 percent. Shanghai stocks have declined 8.1 percent this month……The Shanghai stock index is below its 50-day moving average and below its 200-day moving average.

Not much sign of any wealth effects there at least not positive ones and there were signs of trouble in another area of asset prices too.

An index tracking major developers on the mainland slumped 4.4 percent following a near 5 percent drop the previous session, as a weakening yuan raised fears of capital outflow that could weigh on asset prices.

Actually they have missed something that Will Ripley of CNN did not.

China’s benchmark Shanghai Composite slid into bear market territory Tues, closing down more than 20% below its January high. Chinese stocks have come under pressure in recent weeks from concerns over the strength of the country’s economic growth & an emerging trade war w/ the US.

Of course the definition of a bear market is somewhat arbitrary and Chine’s stock market does tend to veer from boom to bust. But in  these times of easy monetary policy central bankers place a high emphasis on asset prices. This will be reinforced by the falls in the share price of developers as it reminds of the housing market and debt issues.

The Housing Market

Over the weekend the South China Morning Post offered an eye-catching view from Christopher Balding.

Real estate is the driver of the Chinese economy. By some estimates, it accounts (directly and indirectly) for as much as 30 per cent of gross domestic product.

There is something for Mark Carney to aim at as those of us in the UK have time to mull a familiar issue.

Keeping housing prices buoyant and development robust is thus an overriding imperative for China – one that is distorting policymaking and worsening its other economic imbalances.

At first I was not sure about his definition of a bubble.

Despite reforms in recent years, there’s little question that Chinese real estate is in bubble territory. From June 2015 through the end of last year, the 100 City Price Index, published by SouFun Holdings, rose 31 per cent to nearly US$202 per square foot.

However suddenly it looks very bubbilicious.

That’s 38 per cent higher than the median price per square foot in the United States, where per-capita income is more than 700 per cent higher than in China. Not surprisingly, this has put home ownership out of reach for most Chinese.

More than out of reach you would think as it must be multiples of out of reach. Also countries way beyond China’s borders face the issue below.

 Politically, homeowners have come to expect their property values to rise continually in a one-way bet;

There is a rather familiar response at least for UK readers.

Worried about these prices, and about growing indebtedness among developers, China’s State Council has hatched a plan to encourage rentals.

My first thought is that there is a clear opportunity for Gwen Guthrie to translate her hit into Mandarin.

Bill collector’s at my door
What can you do for me, oh?……

‘Cause ain’t nothin’ goin’ on but the rent
You got to have a J-O-B if you wanna be with me

Or to put it more formally.

Wages in China simply aren’t high enough to keep up with the credit fuelled rise in asset prices, and thus developers can’t earn a reasonable rate of return by renting out units.

In terms of the numbers the circle seems to be something of a rectangle.

 In big cities, such as Beijing and Shanghai, yields are hovering around 1.5 per cent (compared to an average of about 3 per cent in the US and 4 per cent in Canada). ……Worse, developers are heavily weighted down with debt, much of it short-term. Many are paying out 7 to 8 per cent bond yields, with debt-to-equity ratios of around 380 per cent.

So the circus requires house price rises of at least 6% per annum to keep the show on the road. But wait there is more and something which to western eyes seems rather extraordinary.

Typically, renters borrow from banks to make an upfront, one-time payment to developers that covers, say, five years.

A rental mortgage is a little mind-boggling. Perhaps though we should have a sweep stake for predict how long it is before we get those in the UK?! Also it is a case of the familiar establishment response to trouble which is to give that poor battered can another kick.

The upfront payment from the bank to the developer provides some short-term cash-flow relief. But otherwise, all it does is delay debt repayments attached to the unit and shrink the loss on unsold inventory.

On a deeper level I wonder how many ( well paid) jobs rely on can kicking and relate to operations which are unviable in profit/loss or balance sheet terms but generate cash for now. How many banks for example or shale oil?

At this stage it all looks rather like the cartoon characters which have to run ever harder just to stand still.

 New starts and land purchases have grown strongly through the first five months of 2018. Investment in residential real estate is up 14 per cent and development loans are up 21 per cent. Far from reducing leverage, banks are jumping back into the speculative bubble: Mortgage growth is now at 20 per cent.

A response

On Sunday, the People’s Bank of China (PBOC) said it would cut the reserve requirement ratio (RRR) for what some banks must keep in reserves by 50 basis points (bps), releasing $108 billion in liquidity, partly to spur lending to smaller firms. (Reuters)

The PBOC operates under a model where it adjusts quantity rather than price or interest-rates. It mostly leaves the latter to influence the value of the Yuan although of course interest-rate moves affect the domestic economy as well. In terms of time you could argue the UK moved away from that in 1973 but anyway the Thatcherite changes of 1979 ended it. In essence it is allowing the banks to raise what is called the money supply ( as it is really money demand) and no doubt some and maybe much of it will be heading in the direction of the housing market in spite of the claim that it is for business lending. In that they are very much like us western capitalist imperialists so shall we call it lending to small businesses in the property sector?

Oh and speaking of the Yuan.

The dollar bought 6.5240 yuan at the close of trading in China, meaning the yuan fell 0.4% on the day, reaching its lowest level since Dec. 28, according to Wind Info. The Chinese currency weakened further on Tuesday morning in Asia, hitting 6.5409 against the U.S. dollar. ( Wall Street Journal)

Care is needed though as whilst the Yuan has slipped over the past week it has still done better against the US Dollar in 2018 than the Euro or the UK Pound £


There is much to consider here. After all there have been scare stories about the Chinese economy before but it has managed to carry on regardless. The catch is that the western economies did this in 2005, 2006 and some of 2007 before it all went wrong. The size of the housing and development sector invokes thoughts of what took place in Spain and Ireland although of course China is much more systemic.

Meanwhile interestingly China seems to have spotted a way of making debt work in its favour. It started well.

Every time Sri Lanka’s president, Mahinda Rajapaksa, turned to his Chinese allies for loans and assistance with an ambitious port project, the answer was yes. ( New York Times)

But only really ended well for China.

Mr. Rajapaksa was voted out of office in 2015, but Sri Lanka’s new government struggled to make payments on the debt he had taken on. Under heavy pressure and after months of negotiations with the Chinese, the government handed over the port and 15,000 acres of land around it for 99 years in December.

Rather like the UK and Hong Kong?




12 thoughts on “The China housing crisis builds up steam

  1. You are right. There have been plenty of scare stories about China and debt, China and zombie companies, China and real estate bubble, China and…. Most people will be blase about the China stories now, but like any crisis that is building you don’t know when the earthquake will exactly strike and what will be the catalyst. You could say the external trade account is essentially what has kept their show on the road, unfairly pursuing mercantilist policies and ‘stealing’ demand from other countries. If that is the case, a well timed poke in the eye with “Trade Wars” could cause the entire edifice to shake China back into its shell for a decade or two like a Japan.

  2. A mortgage to rent, I hope Carney doesn’t read this blog:(

    IF perpetual house price growth is the road to infinite wealth, it seems strange it hasn’t been tried in Greece???

    • Hi Kevin

      Mark Carney of course benefits from a £250k a year mortgage subsidy so is probably confused about the concept. As to Greece the original “rescue” plan was to punish it as various chronicles such as the one by US Treasury Secretary Geithner have told us. By the time the error had begun to be realised the Greek economy was heading south at about 10% per annum at the nadir and it was already too late.

  3. I was interested to read about the easing of capital requirements the other day in the name of helping the economy after Trump’s tariffs. The first thought that ran through my head was that this would help to keep the Chinese property bubble inflated.Then I thought of the Trumpite state banking association head, whom I heard recently advocating the same loosening of capital requirements. That prompted my question to him about a repeat of 2008, given the low rates and Trump’s fiscal loosening, which was met with his assurance that it would not happen again.The BoE has obviously been asking Steve Priest for advice as it reduced capital requirements in the 2016 sledgehammer and then raised them again in 2017, which certainly put the brakes on the housing market. (I now have an image of Steve and Peter Gabriel making a record together). As the local agent is also coming to Edinburgh, I will check that out next month.

    If you go on Youtube, there are plenty of videos of Chinese ghost towns, which look remarkably similar to the Spanish and Irish ones a decade ago, but it is indeed different in China if the rental yield is below the central bank rate of 3.45%. Great-aunty’s former home in Fulham may only yield about 3% in rent, but that is above BoE safe investment rates in itself, let alone any value rise.

    There is also a long video by John Pilger on the coming US v China war, so I was interested to read about Sri Lanka. The Indian Defence Review is also getting very anxious about the String of Pearls naval bases, which it is rumoured that China will extend as far as Walvis Bay with its existing base in Djibouti being augmented by facilities in Aden. Following pressure from the Aussies, there is apparently a plan in Whitehall for three RN ships to go through the disputed South China Sea and for us (with what?) to play a more active role in the Pacific (which we haven’t really done for half a century). We have reopened a base in Bahrain too recently, which makes today’s news of a run on Bahraini bonds, which may be worthless without Saudi intervention, all the more interesting as the West tries to face down Iran at the same time.

    Building empires in this way is as old as the Athenian efforts in the Med in the late 5th century BC and we used a similar strategy by taking islands and establishing strategic ports, which later expanded into full territories. So, it looks like the Chinese are trying the same approach. However, all wars are ultimately about economics and there is usually a major war or series of wars as top dog status passes from one nation to another. The only reason it didn’t happen as that status oassed from the U.K. to the US was of course that another major power threatened to rise. So, I wonder if in his bizarre strategic ways, this isn’t what lies behind Trump’s tariffs? The West broke Soviet Russia in the Cold War economically, so if he has already forced the Chinese to take risks with their property bubble, perhaps a Trump thinks he can collapse China this way before its blue water capability becomes too great? He can always comprise with Europe over the Harley effects.

    That does of course leave important questions for the U.K., EU and combined defence proposals. Max ‘Hitler’ Hastings has already rightly described our carriers and ballistic nuclear subs as unaffordable willy-waving, but maybe a European Defence Community might be capable of it if we are about to embark on a US v China showdown amidst financial crises.

    • Hi Kevin

      I do follow some of the naval issues and if we get the Australian frigate order for our Type 26 then it may be a quid pro quo for us sending ships to the Pacific again. Would I have built 2 big new carriers? No as our smaller ones seemed to work well and were cheaper but we have them now so may as well use them but hopefully not too literally.

      As to the Bank of England you make a good point that the new era of macropudential policy is a beginning of a type of reintroduction of controls on banks. Something we abandoned because it didn’t work. Should people have to queue for mortgages again we can be sure that the current UK regime will drop in like a hot potato. Or as today’s question at the Treasury Select Committee revealed like a bloated FPC expenses claim.

  4. The quotes say that homeownership is out of reach for most Chinese people but also says that the government feels they need to keep house prices high and rising to keep homeowners happy. Then surely keeping them high is actually making the majority of people very angry (like in the UK), So shouldn’t the best choice politically be to let them fall? Also, isn’t giving the minorty an imaginary wealth locked up in their homes minimal compared to the very real, now huge cost of living imposed upon the majority, thus sucking money out of the real ecomony (again, like in the UK and elsewhere?)

    • Hi TG and welcome to my corner of the web.

      In essence you are describing the central banking game which is to feed those with assets with paper wealth gains. Some end up with actual gains by selling and some with implied gains if they are able to remortgage. But so far it would appear that giving people paper gains works and of course there is the recycling via the bank of mum & dad.

      But it is as you imply leaving more and more behind.

    • It’s not by chance that most folks’ wealth is illusory; nor is it coincidental that it can be collapsed in a trice.

      Agenda 21.

  5. ‘That’s 38 per cent higher than the median price per square foot in the United States, where per-capita income is more than 700 per cent higher than in China. ‘

    What could possibly go wrong.

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