Are China’s Property Prices in Freefall?
In response to our recent post on the Chinese economy, a reader asked the following:
Jack, good summary. Do you have an opinion on the housing bubble? Gordon Chang last month said “Residential property prices are in freefall in China . . . .”
Good question. There certainly has been a great deal of commentary on China’s real estate market recently, and it’s very difficult to separate fact from fiction. I’ve spent 70 percent or more of my time each and every year for the past 20 in China, have traveled extensively throughout the country and spoken to many government and business leaders in the course of a year, and I must admit that I am often confused when I listen to what the experts have to say in the press and on television. Most of the time, I just scratch my head and wonder if they are talking about the same China.
For example, the talking heads worry whether China will have a “hard” or “soft” landing, but I see steady 8 percent to 9 percent growth for as far as the eye can see. They opine that bad loans in China’s banks could be a problem, yet Standard & Poor’s recently upgraded its ratings for Bank of China and China Construction Bank, giving the two Chinese lenders higher grades than most of their largest U.S. rivals. They describe “ghost” cities and buildings in China, and I have yet to see one.
At times like this, when the commentary seems so disconnected from my own experience, I like to do a reality check by speaking with as many Chinese business leaders as I can—people that have a real stake in the economy, not economists, government officials or foreign commentators. After all, it’s possible that there is a piece of information that I may have missed and not taken into account.
Fortunately, I had an opportunity to do just that last week while on a bit of a road show in Shanghai, Wuhan, Hangzhou, Wuxi, Ningbo and Hangzhou with one of our clients. In Wuxi, we met with the head of a company that is at the heart of China’s economy. In fact, the company is so pivotal that the general manager apologized for having to leave the meeting for a brief period to take a call from Beijing. Referring to the recent meeting of China’s senior leadership in the capital city, he explained that the government was very interested in hearing his views on the state of the economy.
At the lunch afterwards, I couldn’t wait to find out what he told them. I explained that many stories in the Western press express concerns about China’s economy and its property market, and the impact that a marked slowdown in China might have on the global economy. How did he see it?
He began by saying that China has some unique characteristics that many foreigners don’t understand, and that they tend to rely too heavily on the observations of other foreign experts. That often causes the foreign press to get the wrong take. In his opinion, internal demand in China is so large that he doesn’t see any problem with the Chinese economy remaining stable and continuing to grow. On property prices, he noted that there has been some softening, but also pointed out that many prices had gone up too quickly. He certainly didn’t see a total collapse, or anything like a freefall.
What are the unique characteristics about China that he referenced? For one, the Chinese government, unlike those in the large developed economies, has full control of all the monetary and fiscal levers and has proven to be particularly adept at pulling on them. Like other countries, China can raise interest rates and bank reserve requirements. It can also, though, take administrative measures and tell banks not to lend, or quickly implement restrictions on residential property purchases or down payment requirements. Unlike just about every other major government in the world, China can also control fiscal policy, making key decisions based on economic, not political, considerations. When concerned about an overheated economy that was growing at 13 percent, China put infrastructure projects on the shelf in late 2007, only to take them off again in the final quarter of 2008 in response to the global economic crisis. For better or for worse, actions like these are very difficult to implement in most countries.
In answer to the question from our reader: “No, property prices in China are not in freefall.”
China is a big country, and it’s possible to find a statistic that supports any given theory at any given point in time. Rather than referring to anecdotes about Hong Kong developers slashing asking prices in Beijing or Shenzhen, we should instead look at figures for a greater cross section of the country. The China Real Estate Index System measures prices in 100 cities across China. In November, the average home price at 8,832 yuan ($1,385) a square meter was 0.28 percent lower than October. The November average price was the lowest since May, when it was 8,819 yuan. That doesn’t sound like a freefall to me either!
Very simply, residential property prices have been softening recently in response to measures that the Chinese government has been taking over the past 18 months to stem the rapid rise in property prices that occurred in the aftermath of the global crisis. The government’s policies have worked, and we are now seeing the effects of those policies. With inflation under control, and the steam taken out of spiraling property prices, the Chinese government is now becoming more accommodating and the economy is in transition. In addition to looser credit, many expect housing restrictions in China to be lifted in 2012.
Just like other doomsday predictions that have been made in the past, the ones about China’s property markets will be forgotten six months from now.