Letting the air out of the bubbles, Rather than bursting, mainland real estateand credit markets will take decades to unwind; Joe Zhang, South China Morning Post, 3April 2014 Despite the familiar refrain from analysts these last few years,China's real estate and credit bubbles have not burst. While I, too, am worried, I have not been brave enough to venture aprediction until now: I think the bubble will gradually deflateover a decade or two, rather than burst dramatically. I draw my inspiration from the Chinese stock market, which has beendeflating gently for 22 years and counting. Since China's stock market was created in 1992, it has been abubble. Its price-earnings multiple has fallen from about 100 timesto about 20 times. Excluding the 16 banks that trade atsingle-digit multiples, the ratio is still almost 30 times. That deflation has destroyed trillions of yuan of valuation andhurt many millions of innocent savers and gamblers alike. In these22 years, China's money supply has grown 43-fold, but the stockmarket is still gasping for air. It is truly water torture. China's stock investors often sell their investments inwell-performing stocks and funds while holding on to their losingbets. For example, there are always massive redemptions once a fundoutperforms. So instead of bailing out of a weakening real estate market, theywill most likely hold tightly on to their holdings of housing unitsif the prices should weaken, provided that they have the holdingpower.Peter Lynch, who used to manage money at Fidelity,ridiculed this behaviour as "pulling the flowers and watering theweeds". It is an irrational human behaviour globally, but much morepronounced in China, where retail investors dominate. China's households are very under-geared. Credit card debt is atiny fraction of banking sector assets. Car loans are negligible.Mortgage loans on housing have grown, but nothing like in the US orEurope. For most mortgages, property prices would have to fall by a thirdor even half before hitting equity. Most mortgages older than a fewyears have built a thick cushion on the back of regular repaymentsand rising property prices. Corporate leverage is high in China, but over half of the economyis still in the hands of the state. The government runs a broadlybalanced budget. The central government and the layers of local governments are oneand the same thing. Beijing not only dictates local governments'taxes and expenditures but also sets the formula for sharingrevenues with them. In many cases, the central government also issues bonds on behalfof the local governments. This is sure proof that local governmentsare simply subsidiaries of the centre. We are unlikely to see aChinese Detroit go bust while the central government stands idlyby. In hindsight, the US crisis in 2008 was triggered by the "freemarket religion" long adhered to by the US government and theFederal Reserve. If those institutions had poured enough money intoLehman Brothers and other "too big to fail" institutions when thefirst signs of a panic emerged, a crisis would have beenavoided. In China, there will be no congressional debates in the event ofsuch a challenge. They will just throw money at the problem. Aftermuch politicking, the US government and the Fed did pretty muchwhat the Chinese government did straight away. China doled out a four trillion yuan (HK$5 trillion) stimuluspackage in late 2008 while US politicians were still locked indebate. The Chinese are far more tolerant of the "moral hazard" aquick rescue may create. Finally, it is important to consider some cultural andinstitutional factors related to China's real estate market. (1) Unlike in the US, Chinese citizens cannot declare bankruptcy orwalk away from their mortgages. Their liabilities will be with themforever, until repaid. (2) There is a stigma attached to housing defaults. In Hong Kong,for example, while a person can declare bankruptcy, householdscontinued to service their mortgages long after the values of theirhomes had fallen well below their mortgage liabilities after thecrisis in 1997. So, what is going to happen to the millions of vacant flats and thevery high housing prices across China? The outcome is most likely agradual deflation, lasting many years or even decades. Thedeflation will constitute destruction of household savings andwealth, much like the protracted deflation of the country's stockmarket. But as the destruction will be spread out over many years, its dragon the economy will be gradual rather than dramatic. Joe Zhang is the author of Inside China'sShadow Banking: The Next Subprime crisis? |
Powered by Discuz! X5.0
© 2001-2026 Discuz! Team.
