World to Feel the Effects of Chinese Property Market Lull in 2012

The latest troubles brewing on the horizon of international economic happiness is of course the continuing EU debt crisis, but this is quickly being overtaken by the situation in China...

The world has never been more internationalised than it is today. For better or for worse and like it or not, our economies are all reliant on one another. This is good from the angle that we shouldn't see another World War (touch wood) but bad from the angle that if one of the major economies makes an error in its economic management and crashes, we are all likely to feel the consequences. For example we all know that the global financial crisis started with the US easy credit bubble burst in 2006 it sparked a domino effect on economies around the world.

The latest troubles brewing on the horizon of international economic happiness is of course the continuing EU debt crisis, but this is quickly being overtaken by the situation in China. China is the fastest growing economy in the world and, while it is still much smaller than the US in overall size, it is still considered one of the economies capable of sending a shockwave throughout the global economic infrastructure.

This is not just in hearsay or commentary; the International Monetary Fund testified to this when it asked China to join the Financial Sector Assessment Program (FSAP), along with 24 other "systemically important" economies including: Brazil, Britain, Hong Kong, France, Germany, Italy, Japan, Russia and the United States.

The findings of China's first FSAP were that, while "China has made remarkable progress in its transition toward a more commercially-oriented and financially sound system", and while the economy is in generally good shape, more must be done to protect it from potential shocks. The report mentioned: deterioration in loan quality due to rapid credit expansion, growing disintermediation by shadow banks and off-balance sheet exposures, and the uncertainties of the global economic scenario, as well as - the big one for us, - a downturn in real estate prices.

A downturn in real estate prices is no longer a potential threat; it is a current reality and one that we look like being faced with for a considerable period of time - contrary to popular belief. Chinese property prices are falling and they are falling hard.

According to the latest home price data released by the National Bureau of Statistics on Dec. 18, average home prices in 70 monitored cities fell 0.17% in November from a month earlier - the second consecutive monthly decline. Prices decreased 0.13% in October and rose just 0.01% in both September and August. The data also showed that prices of new homes in 49 out of 70 cities dropped month on month in November, up from 34 in October.

What's more we know there is no let up in sight. Prices are falling because of the government crackdown, which started off gradual but ended up choking the market from every angle, home purchase restrictions, higher down payments for multiple homebuyers and curbs on onshore and offshore financing options for domestic developers. The government has said that it will not be relaxing these policies until prices are at a "reasonable level" and who knows what level that is for a communist government.

Developers are already finding it hard, facing possible credit downgrades from international ratings firms as property transactions fall sharply and they find it harder to raise capital.  Yu Liang president of China's largest listed developer China Vank said the firm is ready to take cautious measures to get through tough times that may further worsen its property sales. The firm has seen sales fall for the past 4 months, to the low of RMB 8.29 billion ($1.3 billion) in November, from RMB 10.34 billion in October.

What's more experts at the Noah (China) Wealth Management Centre are predicting a 3.5% decline in prices for this year, which is more than the 1.65% decline seen in 2008 at the height of the international financial crisis. The question is, has the IMF factored in the potential for developers cutting jobs and/or going bankrupt as a result of a real estate downturn, or would it be a second risk emerging at the same time and potentially enough to put the Chinese economy in real danger. Another question, how long would the government allow jobs to shrink before it puts the genie back in the bottle? And finally, if the Chinese property market does all out crash how much will it impact on the rest of the world?

It is unlikely to affect it as bad as the American crash. Chinese homeowners tend to have much bigger deposits than was common in America, which means that banks wouldn't take such a hit. That said China is a massive owner of sovereign debt, especially American, as well as American state-guaranteed mortgage backed securities. At a time when finding buyers for sovereign debt is perhaps more important than it has ever been, the last thing we need is China having an economic hangover from its binge on real estate regulation.

Ultimately time will tell, as always with China we just have to hope for the best, but prepare for the worst.

- Wednesday 25 January 2012

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