China’s Evergrande debt crisis is the focus of the moment but property on China’s economy is the story. For the first time since the housing welfare system became a proper market, China’s property is facing up to a decade or more of stagnation. 1/7
First up demography. China’s cohort of first time prime age homebuyers, aged 25-39 is going fall by 25% by 2040, from 327m to 247m. So properly firms already overbuilding are in deep doodoo 2/7
Next sales. These are now falling year on year by a lot. August/Sept together maybe down 30% year over year. And it could get worse as developers retrench, are forced to discount, manage too much inventory 3/7
Households are in no position to get more deeply involved if property transactions and wealth are on the turn. Household debt is now > $10 trn, having soared in recent years. Debt to disposable income is now 130% abd > USA. 4/7
Local government land sales are fine a third year over year and these guys will be hurting given the significance of revenues. How can they carry on building, borrowing, and providing for common prosperity? They can’t. 5/7
Finally prices. Hard to tell what’s going on but for 1st time, prices could fall over a protracted period. It’s tough to call the balance btw lower prices and lower volumes, but both are likely. 6/7
All in all, we need to brace for years of a more stagnant property market with unequivocally negative consequences for growth. Perhaps 2%, maybe even recession ‘with Chinese characteristics’. It’s a slippery path for China at home, and abroad. Ends
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I remember at UBS we used to write in 2000s how and why China’s property market was the most important in the world. Fast fwd to 2021, it still is. At over 16% GDP, its more than 2 x US real estate in 2008. Evergrande et al are key to real estate, & metaphor for the economy /1
It surely cannot be allowed to end up in a messy default with collapsing property prices a) anyway b) so close to nov 22 Party Congress, but govt restructuring plan can’t wait too long as fin distress mounts /2
That said, extend and pretend, and other restructuring solutions will only defer a denouement for real estate, which is cyclically and structurally weak and having regulatory headwinds, incl from Common Prosperity. /3
China’s crackdown on tech, finance & data isn’t over, and while each firm/sector has its own tale,the big pic is more ominous/political and not just about regulation. My take on why CCP is providing latest in why ‘inevitable rise’ isn’t a slam dunk at all newstatesman.com/world/asia/202…
Aside from fact that CCP is not comprised of economic magicians, China’s development path, which many extrapolate on spreadies to mid century +, isn’t a mechanical concept. Too many need reminding of both. /2
I’m addition to Red Flag structural headwinds, China now faces the most hostile external environment in over 4 decades. What some see as it’s Sputnik moment may also be game changer in more troubling, negative ways. /3
China tech crackdown rolls on, today the gaming sector. But what do all these sector campaigns in tech, finance and data actually mean? Is China boldly going, or screwing up? /1 Tencent Shares Dive After Chinese Media Brand Online Games ‘Spiritual Opium’ bloomberg.com/news/articles/…
Much of what’s going on falls under Xi’s social agenda, aka common prosperity, in which the CCP will act against tendency of markets to exacerbate inequality or threaten party’s control of data, unchallenged power and so on. /2
You can come up with reasons on a case by case basis to see China blazing a trail that many liberals would support to act against consumer technologies that add little to economic welfare and may undermine it /3
Interesting chart from Capital Economics showing how mkt valuation of Chinese equities has slumped to lowest since the 14/15 crash, other than covid in early 20. How much further will this go? /1
Or is this the buying opportunity many hope it represents? The answer is strongly weighted towards the former, ie China’s robust moves to restrain free and open capital markets is part of a wider script even allowing for ostensibly reasonable social agenda goals. /2
So acting pro ppl who can’t afford expensive tutoring, gig workers, data privacy all seem fair, but the bigger picture is a political clamp down on private firms and entrepreneurs. Remember ‘the party leads everything’, and we can see evidence predating Ant by a long way /3
China's tech etc crackdown is leading to a huge valuation change, eg here NASDAQ Golden Dragon Index capturing lge and mid cap Ch tech stocks trading in NY. Buying opportunity or giant wake up call? Here's why it's more likely the latter /1
Fair to say that every sector has its own tale to tell.. fintech, data, tutoring, music streaming etc. But the big pic narrative is abt the pol crackdown on private firms, especially those with lots of foreign investment (direct and via listings in the US), interest and ideas./2
More private firms are being brought to heel as control > growth and innovation.Contradiction is clear. Government doubtless believes in power of tech firms to change the world in its favour but clampdown is frustrating its own ambition. Not widely appreciated yet, or priced /3
The centenary is actually later this month not today, but the CCP doesn’t let facts interfere with its version of history. Today’s big speech by Gen Sec Xi Jinping was typically nationalistic. Main take aways /1
In a strongly nationalist appeal to his own citizens and warning to the US and other states, the main take-away is irony. He emphasised and drew applause for saying that foreign powers would ‘get their heads bashed’ if they attempted to bully or influence China. /2
Yet outside China, the dominant view is that it is Beijing that seeks to bully, influence, and even interfere so as to stifle criticism of and gather support for China’s narratives and actions. /3