China’s Worrisome Economic Issues (3) – Housing Bubble

精英理财Aurora

This is a very familiar topic to everyone. Because of China’s long lasting disappointing stock market, investors have turned to real estate and WMPs. Beijing’s home price rose 16.4% in October from a year ago, Shanghai up 17.8% and Guangzhou and Shenzhen up 20%. Home prices are rising to 22 times annual household income. It’s estimated urban housing construction at around 20 million new units per year, which is well in excess of demographic demand in the range of 9 million to 16 million units. Here is a CNN video about China’s housing bubble.

However, housing bubble is still lesser of the three evils. Right now real estate investment in China accounted for 13.8% nominal GDP, but this is not unprecedented among Asian countries during their booming stage. Japan amounted to 20% in 1980; South Korea amounted to 21.4% in 1990. On one hand, the government wants to cool down the price, but on the other hand, this is the majority source for local government revenue and a large portion of the GDP, thus the government is reluctant to curb it. China’s recent reform plan included a few items to steer towards the right directions, including property tax as well as Hukou reform to make it easier for people to move from rural to urban areas, thus increasing the actual demand and lowering the vacancy rate.

The problem is the three issues: shadowing financing, local government debt and housing bubble are all intertwined. Home builders and local government rely on WMPs for a significant source of their funding. Majority of local government revenue comes from housing market. This might become the next ticking time bomb, if any one flare, the others could also go off. In the past China’s massive reserve and mostly closed of from foreign investments had helped China escaped many disasters. But if its appetite for credit continues growing, the reserve won’t be enough to save it any more. As the world’s second largest economy,China’s credit excesses has become the second-largest risk facing the world, only behind the fundamental instability of the Eurozone.