Category Archives: housing bubble

“China Data, Part 2: Slowing Growth”

Chovanec has yet more analysis on the Chinese economy over here. Go read the entire thing, it’s not toooo long but makes a pretty solid case for how serious the challenges facing China’s economy really are. His introduction:

As China enters 2012, concerns that its economy may face a “hard landing” have entered the mainstream. In recent weeks, Paul Krugman (“Will China Break?” in the New York Times) and Robert Samuelson (“China’s Coming Slump?” in the Washington Post) both penned hand-wringing op-eds warning of an impending Chinese downturn. It’s interesting to see the rest of the world starting to wake up to the worrying trends we’ve been discussing on this blog for some time now.

When people talk about a “hard landing,” they’re usually talking about a sharp deceleration in GDP growth, which brings with it both business failures and unemployment. In two earlier posts (Parts 1 and 1A), I examined a variety of data points that suggest China’s real estate market is in the midst of a serious downturn. In this post, I want to take the next step beyond this and explore the impact of collapsing property prices on the pace of broader economic growth, and the prospects of a “hard landing”.

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“More on Property Downturn”

Chovanec is still on a roll:

First, two on-the-ground reports about the property bubble bursting in 2nd-tier cities. Bloomberg offers this report on Sanya (on China’s southern island province of Hainan) where the frenzy to pick up vacation villas has taken a nosedive, with home prices dropping 28% year-on-year in November and sales volume off 52%. Steve Dickinson, based in Qingdao (in the northeast coastal province on Shandong) reports on ChinaLawBlog.com that developers there are regularly offering 30-50% discounts and that construction on uncompleted projects has slowed. He says “the collapse in the real estate market has already occurred” and the only remaining question is how the government will pick up the pieces. In a related post, he relates the story of a Qingdao couple who now find themselves deep underwater after going into debt to buy a unfinished apartment at the peak of the market. Events in Sanya and Qingdao reinforce my point that China’s property bubble — and its consequences — is really a nationwide phenomenon, by no means limited to Beijing and Shanghai.

Caixin offers this report on the huge stress that plummeting land sales are putting on local government finances. As one expert declares, “The land market is basically deadlocked” as developers enter “winter mode” and stop buying land for new construction projects — a description eerily reminiscent of my own warning, at The Economist China Summit last month, that “winter is coming.” Again, the problem is even more serious in 2nd and 3rd-tier cities (Dalian’s revenue down 50%, Wuxi’s by 34%, Nanjing by 29%, Wuhan by 21%) than in Beijing (down 14.4%)and Shanghai (down 13%). The revenue shortfall is making it hard for some cities to pay for basic services like police and hospitals, much less repay the massive amount of debt they borrowed for stimulus projects – which, according to this report from Bloomberg, may be much larger than official statistics suggest. Interestingly, Caixin reports that some city governments are forcing local developers to continue buying land whether they want to or not — which makes local efforts to loosen up lending look less like real economic stimulus and more like a dangerous game of pass-the-buck.

Finally, I just have to remark that I find it a real hoot when I read officials claiming — and credible media reports repeating the claim – that plummeting property prices across China are evidence that the government’s top-down “cooling” measures are “taking effect” and ”working.” Keep in mind, the central government started putting its most prominent administrative controls, such as purchase restrictions, into effect in April 2010 — nearly two years ago — and began trumpeting their success a mere two weeks later. The reason we are where we are now is because property developers ignored those measures and piled up unsold inventory for nearly two years in the not-unreasonable belief they could call the government’s bluff. (I said as much at the time, on Chinese TV — see interview on May 18, 2010, beginning at point 23:50). Even when rapid credit expansion caused inflation to balloon, forcing the central bank not exactly to tighten, but at least rein in the pace of that expansion, authorities turned a blind eye to an explosion in off-the-books shadow credit that kept funding land purchases and construction, and applauded when statistics showed real estate investment continuing to grow at 25-30% year-on-year – until this Fall, when the growing need to roll over bad debt while keeping inflation in check made it well-nigh impossible to keep throwing money at this boom.

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“China Data, Part 1: Real Estate Downturn”

I’ve been hearing a lot about the real estate market downturn recently, and Chovanec has the best piece exploring all of the potential ramifications- this could be way bigger than it sounds:

The first signs of a downturn emerged in August, when China’s top 10 property developers reported unsold inventories totalling RMB 318 billion (US$ 50 billion), up 46% from the previous year. Highly leveraged, with debt to asset ratios approaching 65%, developers were coming under increasing pressure to liquidate those inventories for cash. The fire sale began in October, with several Shanghai developers slashing sale prices on new apartments by 25% or more. The discounts sparked angry (and sometimes violent) protests from investors who had previously bought the same units at full price, demanding refunds.

One location of particular interest is Ordos, the so-called “ghost city” in Inner Mongolia which I’ve been interviewed about so many times on TV. This summer, I began hearing stories of financial troubles — even a few suicides – among some of the less well-connected developers and speculators. Then, a few weeks ago, qq.com carried a dire report that average property prices there had suddenly plunged 70%, from RMB 10,000 per square meter to RMB 3,000, spawning a massive credit crisis.

The pressure on developers is unlikely to ease up anytime soon. According to property agency Centaline, unsold developer inventories reached new highs in September and October, levels that it calculates would take at least 22 months to clear in Beijing and 21 months in Shanghai, assuming normal sales volumes, even if no new projects were completed. Because more projects are underway, Centaline said it expects the country’s unsold housing inventory to keep growing and peak only in March of next year.

Caijing magazine paints a similar picture, estimating that the unsold housing piled up by developers in various cities across China would take roughly 12 months to sell at normal transaction volumes. It reports that, by the end of November, the total inventory of new unsold housing in eight major Chinese cities reached 45.95 million square meters, an increase of 38.4% over last year — and was still growing, by 3.1% over the previous month.

How investors in the secondary market will react to the collapse in primary market prices is the biggest question of all. As I’ve mentioned many times, many people in China buy multiple units of housing in order to hold them empty indefinitely, as a form of savings. They do this because they have few attractive alternatives and because they have faith that housing prices will go up.

Even without sparking a panic in the secondary market, a prolonged correction in the primary market is enough to pose a serious challenge to the broader Chinese economy. Remember what that unnamed realtor told WantChinaTimes.com, that “if the situation continues, many property projects will be postponed next year.” According to Shanghai Securities News, PBOC data on new bank accounts being opened by developers indicates that fewer projects are being initiated, and that property investment is slowing.

According to a central government study, local governments in China depend on land sales for approximately 40% of their revenues. The all-purpose answer, whenever doubts are raised about the ability of local governments to repay the loans or bonds that funded various stimulus projects, is that they can always sell more land. But when developers stop building, because they are too busy desperately trying to liquidate their existing inventories, they stop buying land.

According to Centaline, in November, 117 land parcel auctions in 35 major cities failed to find a buyer.

Suffice it to say — and I will have plenty more to say about this in follow-on posts — ever-rising land prices serve as one crucial underpinning for China’s entire financial system (the other, as we will see, is the nominal fiscal balance sheet of the central government).

The more you read about the real estate market and the overall Chinese economy, the less sense the entire system makes. That it has so many connections to local governments, who are themselves already sitting on massive piles of debt, just makes the entire thing more worrisome.

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“Pair take a stand in Wukan, China, but for how long?”

Tom Lasseter has a new article about Wukan, where the status quo holds for now:

Lin Zulian and Yang Semao are wanted men.

The mayor of the city that oversees this farming and fishing village has publicly named the pair as main agitators of Wukan’s recent rebellion against the local government. Acting Shanwei Mayor Wu Zili vowed to crack down on them and their allies, according to state media.

Such a threat would terrify most Chinese in a nation infamous for police state tactics. But on Friday morning, both men stood in front of a crowd of thousands here and railed against local corruption.

“The officials are lying to the villagers,” Yang said, standing behind a large photograph of Xue Jinbo, a fellow advocate who died in police custody Sunday. A few minutes later, he burst into tears that were echoed by heaving sobs from the rows of people in front of him.

While the open flouting of government rule in Wukan almost certainly won’t last very long — and it’s occurring only in one nook of one province — moments such as the rally Friday are breathtaking for an authoritarian state. The leaders of the revolt, which has sealed off the village from security checkpoints, are attempting to make the point that, as Lin said, “the people who have committed crimes are the corrupt officials.”

So far, Beijing is trying to contain Wukan’s message both physically — with police at the main road leading into the village — and in the realm of public opinion by censoring news and comments on the Internet.

In the meantime, officials are trying to drive a wedge between locals. Some residents have received text messages urging, “Please calm down, the leaders are already dealing with the problem.”

But calming the populace has become more complicated as China’s rocketing economic expansion runs parallel with strictures on political discourse, a combustible mix that gives officials access to riches at the same time that it restrains citizens’ ability to speak up.

Adding to the potential troubles, the government may have provided the rebels in Wukan with a martyr.

Xue Jinbo was part of a committee of 13 villagers, including Lin and Yang, that formed in September to negotiate with area officials after demonstrations and a police crackdown that month. After plainclothes security took Xue away last Friday, state media announced that he’d died Sunday of heart complications.

Xue’s family and seemingly everyone else in Wukan thinks that he was murdered, and they cite as proof the government’s refusal to release his body.

“For those who’ve seen my father’s body, they believe that he was beaten to death,” said Xue’s son, Xue Jiandi, a 20-year-old university student in a brown flannel shirt and jeans.

During memorial services Friday for Xue Jinbo, groups of villagers walked down a green carpet in groups of 30 to 40, stopping to bow in unison and pay their respects to a picture of him. Women wailed beneath a blue funeral tent.

The procession of mourners lasted for hours.

At one point, a man stood outside and yelled: “There is no body! There is no body!”

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Wukan Protests: Dabian Hits the Fan

Wukan, the Guangzhou village which has slowly been getting more and more out of hand, seems to have crossed a handful of lines. There are a ton of good stories on this from all over the place- Malcolm Moore was in the village itself and filed this:

Wukan has been encircled by the police cordon since Sunday, after a failed attempt by 1,000 armed police to capture the village. No food or water is allowed in, and no villagers allowed out.

Villagers say that they have enough supplies to hold out for only 10 more days.

But the villagers were unbowed yesterday, and their leaders said they had seen signs that the government would “blink first”.

Trouble in Wukan has been brewing since September, after the fishing village revolted at an attempt to take one of its last parcels of farmland and give it to a major Chinese property developer, Country Garden.

However it was the death of 43-year-old Xue Jinbo, one of the village’s 13 temporary representatives, in police custody that pushed Wukan into its current fury, and saw the last of the village’s dozen Communist party officials flee. His family believes he was murdered.

Thousands of villagers have held daily protest meetings outside the village hall since the news broke on Monday.

He later left the village, explaining:

The first rule of journalism is never to leave a running story.

Especially when you are the only journalist in town.

So why did I pull out of Wukan, slipping back past the police cordon last night down a slip road?

The story in the village is far from over, although I believe the situation is unlikely to change in the next few days, as the two sides tentatively negotiate their way towards a resolution.

The siege continues and on Dec 16 the village will mark the seventh day since Xue Jinbo, one of its representatives, died in police custody, an important public day of mourning.

The reason we had to pull out is because we felt we were putting ourselves and the villagers in danger by staying.

Jonathan Watts of the Guardian once told me, in my first few months in China, that the problem with being a journalist here is that you are surrounded by a ring of fire – you stay safe, but everyone else gets burned.

Custer from ChinaGeeks has been writing about the implications:

I don’t think I need to explain the ways in which this event is amazing, and I mean that in the literal sense of the word. Anyone with a funtional brain and half an eye on the Chinese media is aware that local government land grabs are a huge source of discontent, but if you’d told me a few months ago that a Chinese town would band together, run the local officials out of town, resist a force of 1,000 police officers intent on entering the town again (but, thankfully, not willing to use lethal force to do so, at least not yet), establish their own makeshift government, and keep the whole thing running even this long, I would have told you you were nuts.

Before we go any further, I want to get this out of the way: no, this is not the first spark in some nationwide rebellion that will see the national government overthrown. In fact, it’s not even a rebellion against the central government, as you can tell from the pleas for help from Beijing in Moore’s article.

Still, it puts Beijing in an awfully interesting position. As I see it, they have three basic options:
-Come to the rescue of the down, declare the local government officials corrupt, put them on trial and restore order peacefully. This is, I suspect, exactly what the people in Wukan want.
-Come to the rescue of the officials and provide them enough manpower to completely crush the rebellion. This would be easy, but would attract a lot of negative attention internationally, and there’s a risk of it leaking online domestically, too.
-Do nothing for the time being, and see if the officials can regain control on their own, or if the rebellion spreads.

The last option seems by far the most likely to me, which is good and bad news for the protesters in Wukan. No help is coming from Beijing, but at least that means the PLA probably isn’t coming either.

Of course, the central government isn’t really doing nothing, as mentions of Wukan
are being scrubbed from the media and deleted online. As you would expect, searching for “Wukan” on Weibo gives you the classic “According to the relevant laws, these results can’t be displayed” message.

He also has some pictures that give a sense of the scale. Another post, here, has more pictures and a video from the scene. Meanwhile the WSJ has an article about Wukan which mentions the broader picture of the dangers of land grabs:

Mr. Yu estimates that local officials have seized about 16.6 million acres of rural land (more than the entire state of West Virginia) since 1990, depriving farmers of about two trillion yuan ($314 billion) due to the discrepancy between the compensation they receive and the land’s real market value.

China’s Land Ministry has also warned that misappropriation of farmland has brought the country dangerously close to the so-called red line of 296 million acres of arable land that the government believes it needs to feed China’s 1.34 billion people.

The Land Ministry, which uses satellite imagery to spot abuses, launched a fresh crackdown on illegal land use this year, targeting golf courses, hotels and villas in particular, and has announced several high-profile cases in which officials have been punished.

But the central government’s attempts to curb such abuses, and to draft new legislation that would protect against land grabs and give farmers a market rate for their land, have met fierce resistance from local authorities who rely on land sales to maintain growth, service debt and top up their budgets.

In 2010 alone, China’s local governments raised 2.9 trillion yuan from land sales. And the National Audit Office estimates that 23% of local government debt, which it put at 10.7 trillion yuan in June, depends on land sales for repayment.

Finally, China Media Project has a post about how Beijing is directing the censorship of this case:

Finally late yesterday, just minutes before midnight and after a uniform blackout in Chinese media through the day, we had two news stories on Wukan from China News Service, China’s number-two official newswire. The first reported that Shanwei city authorities revealed at a press conference on the Wukan incident (乌坎事件) yesterday that “preliminary investigations have ruled out external force as the cause of death” in Xue’s case. The news story also said that the city’s medical expert shared photos of Xue’s body during the press conference.

The second China News Service report, also based on the press conference, said that “various village officials” from Wukan had been detained for discipline violations.

Curiously, though, there seems to be no coverage of the press conference from other media. That suggests that these stories can be taken as an illustration of “public opinion channeling” tactics at work. The authorities, in other words, are selectively releasing partial information from an official perspective in an attempt to frame and re-direct public attention. Message 1: Xue Jinbo was not killed by police, an assertion that removes the immediate reason for escalated tensions in Wukan. Message 2: local Wukan leaders have been detained for suspected discipline problems, an action that (leaders undoubtedly hope) will remove the initial underlying cause of tensions, alleged dirty land deals.

More as it comes in.

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“China’s Ordos property bust offers warning sign”

I’d be careful about drawing large-scale lessons from Ordos- it seems to be an extreme case. But the same principles that are at work in Ordos also seem to be at work in much of the country, and now via Reuters we hear that they’re starting to hit some serious snags:

The monumental, neo-Mongolian sculptures, empty plazas and hulking concrete shells of buildings in Ordos district, deep in the steppes of Inner Mongolia, are a potent symbol of how China’s property boom can turn to bust.

Off the back of a thriving coal industry, the local government has been building a new city for one million people called Kangbashi. It sits virtually empty and property prices are falling.

Even in the old city of Dongsheng where people live and work, some 45 minutes drive away, a wave of investment has backfired. Cranes sit idle over unfinished skyscrapers and migrant workers are fleeing.

The swing in fortune — residents and property agents say prices have dropped by up to a third — is a severe example of what is happening in cities across China, including Shanghai and Beijing.

After a housing bubble that doubled values in 35 cities between 2004 and 2009, prices are now falling nationwide. The central bank said on Friday property prices had reached a turning point while banks are worried a price slide of 20 percent could trigger panic selling.

“People are worried. Especially if they have bought two or three apartments,” said Yu Mingjun, a worker sitting in a down jacket at a ramshackle office of a half-completed project in the old town.

Nationwide, the decline is so far more modest. Home prices fell slightly in October from September for the first time this year, official data showed, but private surveys indicated prices began falling in September and continued through November.

With local governments often dependent on land sales to fund payments on a staggering 10.7 trillion yuan ($1.7 trillion) of debt, Beijing worries that a collapsing property market will trigger a wave of defaults that in turn will hit the banks.

“If society demonizes the property sector, especially if buyers think prices will fall, creating a sharp cooling off for instance 30-40 percent, I think that’s very serious,” said Hui Jianqiang, head of research for consultancy E-House China.

More worrisome, the property market, which contributes about 10 percent of Chinese growth and drives activity in 50 other sectors, could drag the real economy to a hard landing.

In empty showrooms of Dongsheng, Ordos’ old city, saleswomen immediately offer 30 percent price discounts if a buyer is willing to pay for a property upfront and in cash.

Chinese and foreign media seized on Ordos as the prime example of wasteful and pointless government projects after the government built the sprawling new city of Kangbashi.

Investors view ghost towns like Kangbashi as an example of the sort of excesses that could pull hard on the reins of the country’s growth.

On Thursday, a policeman shooed a Reuters cameraman away from the Wenming (“Culture”) property development right near government buildings in Kangbashi, as workers bearing shovels walked in to demand their last payment before heading home.

“Kangbashi is a sensitive place now,” he said.

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“Property Prices Collapse in China. Is This a Crash?”

Maybe, maybe not. The idea that the Chinese property market is some kind of unstoppable force that will power China indefinitely is a joke, though. Via Forbes:

Residential property prices are in freefall in China as developers race to meet revenue targets for the year in a quickly deteriorating market. The country’s largest builders began discounting homes in Shanghai, Beijing, and Shenzhen in recent weeks, and the trend has now spread to second- and third-tier cities such as Hangzhou, Hefei, and Chongqing. In Chongqing, for instance, Hong Kong-based Hutchison Whampoa cut asking prices 32% at its Cape Coral project. “The price war has begun,” said Alan Chiang Sheung-lai of property consultant DTZ to the South China Morning Post.

What started slowly in September turned into a rout by the middle of last month—normally a good period for sales—when Shanghai developers started to slash asking prices. Analysts then expected falling property values to move Premier Wen Jiabao to relax tightening measures, such as increases in mortgage rates and prohibitions on second-home purchases, intended to cool the market.

They were wrong. After a State Council meeting on October 29, Mr. Wen affirmed his policy, stating that local authorities should continue to “strictly implement the central government’s real estate policies in the coming months to let citizens see the results of the curbs.” Then, the selling began in earnest as “desperate” developers competed among themselves to unload inventory. One builder—Excellence Group—even said it would sell flats in Huizhou at its development cost.

Citi’s Oscar Choi believes prices will decline another 10% next year, but that’s a conservative estimate. Even state-funded experts are more pessimistic. For example, Cao Jianhai of the prestigious Chinese Academy of Social Sciences sees price cuts of 50% on homes if the government continues its cooling measures.

When Beijing’s pet analysts are saying prices could halve in a few months, we can be sure they are thinking the eventual sell-off will be worse. In any event, the markets are bracing for trouble. Investors are dumping both the bonds and the shares of Chinese developers, and legendary bear Jim Chanos, citing the property market, late last month said he is still not covering his short positions on China.

One does not have to agree that China will be “Dubai times 1,000—or worse”—Chanos’s memorable phrase—to understand that the unwinding of “the biggest housing bubble ever created” will be especially painful. Analysts have great confidence in Beijing’s technocrats because they managed to continue to manufacture growth through the global downturn, but most of us seem to forget that the Chinese, through massive stimulus, created even bigger challenges for themselves. At the moment, Beijing has yet to resolve two intractable problems: persistent inflation and artificially high property prices.

And once housing prices return to Earth, will it still make sense for development companies to power the Chinese economy like they do now? And will seizing land and flipping it to developers still be the ‘free money cheat code’ it is now for local and city governments? And if they don’t have free money anymore and are already in massive debt, what happens next?

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“As Its Economy Sprints Ahead, China’s People Are Left Behind”

Another article (this one from NYT) that seems to reflect the darkening outlook on the Chinese economy:

Wang Jianping and his wife, Shue, are a relatively affluent Chinese couple, with an annual household income of $16,000 — more than double the national average for urban families.

They own a modest, three-bedroom apartment here in this northeastern industrial city. They paid for their son to study electrical engineering at prestigious Tsinghua University, in Beijing. And even by frugal Asian standards, they are prodigious savers, with $50,000 in a state-run bank.

But like many other Chinese families, the Wangs feel pressed. They do not own a car, and they rarely go shopping or out to eat. That is because the value of their nest egg is shrinking, through no fault of their own.

Under an economic system that favors state-run banks and companies over wage earners, the government keeps the interest rate on savings accounts so artificially low that it cannot keep pace with China’s rising inflation. At the same time, other factors in which the government plays a role — a weak social safety net, depressed wages and soaring home prices — create a hoarding impulse that compels many people to keep saving anyway, against an uncertain future.

Here in Jilin City, where chemical manufacturing is the dominant industry, the state banks are flush with money from savings accounts. The banks use that money to make low-interest loans to corporate beneficiaries — including real estate developers, helping fuel a speculative property bubble that has raised housing prices beyond the reach of many consumers. It is a dynamic that has played out in dozens of cities throughout China.

But tomorrow’s money may not be worth as much as today’s — not as long as their savings account earns only a 3 percent interest rate while inflation lopes along at 6 percent or more.

Yet the Wangs see no good alternatives to stashing nearly two-thirds of their monthly income in the bank. They are afraid to invest in China’s notoriously volatile stock market. And Chinese law sharply limits their ability to invest overseas or otherwise send money outside the country.

Nor do the Wangs feel flush or daring enough to join the real estate speculation that some Chinese now see as one of the few ways to get a return on their money — risky as that might prove if the bubble bursts.

Mainly, like many in China, the Wangs save because they worry about soaring food prices and the high cost of health care, which the People’s Republic no longer fully provides. They also worry about whether they can afford to buy a home for their son, a cost that Chinese parents are expected to bear when their male children marry.

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