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China Fact of the Day
I was just speaking with an expert on the Chinese banking and finance system and I asked him what were the major problems with the Chinese banking system. He replied, "Well, housing prices are falling and many banks have bad loans and if prices fall much further the borrowers won't have the money to pay the loans back." I kid you not.
Also, contra the U.S. the Chinese Central Bank is reducing the growth in the money supply to combat inflation. Interesting times.
Posted by Alex Tabarrok on June 23, 2008 at 12:00 AM in Web/Tech | Permalink
Comments
Please, stop your "posts from China" series. They are awful.
Posted by: Arnie at Jun 23, 2008 12:32:07 AM
Bad loans in China? That's nothing new. It used to be bad loans to loss-making state-owned companies, which banks were ordered to make.
The government fixed that problem by throwing a lot of money at the banks. When your foreign reserves are growing by, what? $50 billion a month? you can paper over a lot of bad-loan problems.
Back when house prices were rising too fast, the Chinese government applied a number of blunt measures, including more or less banning most foreigners from buying Chinese real estate and taxing quick flips. Unlike the Fed, the Chinese weren't shy about trying to pop that asset price bubble.
Posted by: at Jun 23, 2008 12:39:46 AM
Let's look at some facts first:
Demand in the China market, excluding rural areas, is running at 3.8m homes per year in an environment where property prices are underpinned by nominal income growth running at between 8-12% a year in most cities and where the home ownership ratio remains in most urban areas only around 30%. Meanwhile, the best evidence of the absence of leverage in the residential mortgage market, and so the lack of downside risk, is the lack of mortgage finance. Thus, 55% of the property sales made by China’s largest property developer Vanke last year were paid for by cash. This trend, and rising incomes, also explains why leverage has been declining. Outstanding mortgage loans as a percentage of property value sold have declined from 52% in 2003 to 36% in 2007, according to CLSA estimates. It is also interesting that Vanke, as China’s largest developer, still only has a 2% market share. The growth opportunities as well as the consolidation opportunities are enormous, though it would be positive to see a wave of smaller developers going bust. For that would probably be the catalyst for Beijing to signal a relaxation as regards its cooling down policy towards the sector.
In conclusion, China does not have the same risk exposure as the US due to it's lack of leverage, high income growth and still low home ownership ratio. The sector is currently under great policy pressure and investors are holding their money. The fundamental demand is still there, but just not the timing.
On the other hand, there's still a lack of investment products for domestic Chinese at the moment. Real estate, is still the only investment option for majority Chinese people (as the stock market is in deep decline).
Your expert is not that good. Trust me.
Posted by: Sean at Jun 23, 2008 1:21:46 AM
Sorry to burst your bubble, but you are wrong about US money supply.
The monetary base (adjusted, from the St. Louis Fed) is rising only about 1% year-to-year currently.
That is the slowest growth since the Y2K transition and one of the slowest growth rates
in the past 50 years. The growth of the base has been slowing since early-2002,
when it rose about 10% year-to-year.
Posted by: B.H. at Jun 23, 2008 10:51:45 AM
A good summary on the current status of the Chinese property market:
http://www.economist.com/agenda/displaystory.cfm?story_id=11605123
And an older but fascinating story on black market lending in China, which may well cause problems if the property market collapses:
http://www.economist.com/finance/displaystory.cfm?story_id=9622318
Posted by: Silviu at Jun 23, 2008 11:55:24 AM
As part of my continuing campaign to correct economic vocabulary, I must point out that "growth in the money supply" IS inflation.
Posted by: Noah Yetter at Jun 23, 2008 4:30:45 PM
I had a meeting 1 hour ago with China Resources Land, which is one of the larger developers in China. They are not seeing any increase in defaults. Sales are weaker than last year but they have sold 40% their expected revenue for 2008 with an expectation of selling over 1.3 million sqm.
Mortgage loans are only around 5% of banks' loan book so significant defaults wouldn't have a huge impact on NPLs anyway. What banks want though is to grow their loan book as the loan to deposit ratios are too ow and this hurts profitability. The banks want to convince the central government that if they continue to restrict lending to the property markets it will cause a US style housing collapse and result in government loosening the current lending restrictions on the market.
A typical home buyer in China puts down 40-50% and pays the mortgage off in less than 5 years. On top of that wage growth is averaging 13%. Over the last 10 years home values have grown below wage growth. On top of this you have the highest urbanization growth rates in the world and existing homes are of significantly lower quality than new homes so existing housing stock is not competition for newly built homes. The most significant long run determinant of housing price growth is wage growth. Which is why the US and other Western property markets need to correct. But this certainly is not the case in China.
Posted by: asiequana at Jun 23, 2008 4:37:07 PM
Noah -
>As part of my continuing campaign to correct economic vocabulary, I must point
>out that "growth in the money supply" IS inflation.
As part of my continuing campaign to correct simplistic views of monetary policy, I must point out that growth in the money supply is merely one component of inflation:
http://en.wikipedia.org/wiki/Equation_of_exchange
It is possible for the velocity of money to account for a far larger share of inflation than money-supply growth.
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