Housing Crisis in China: An overview

One reason why I believe the economy is in a much worse state than many seem to want to admit is the state of the housing and retail market. One problem is that the Chinese are yet to experience falling prices and they will not be prepared for the fallout.

Danwei have a useful summary piece with some interesting links. The interview with the original Forbes writer is interesting.

1. Forbes: Olympian Bust?

Beyond the hoopla, an increasingly bleak property market is spreading around China

The sales hall at the oasis housing development welcomes customers with multicolored streamers, water fountains and marble floors. Sales agents inform visitors that only a few units are available from the first two phases of the project and that 70 of the 130 or more buildings are almost completed. But just a few hundred feet behind the sales hall, some of the "almost completed" buildings look like neglected hulking shells, the concrete aging and exposed, the green scaffolding fabric tattered from neglect. Construction workers idled nearby. Prices have been slashed from $95 per square foot to $55. Industry insiders say that as few as 300 units have been sold out of the first 2,000 put up.

The Economist: What goes up

Numerous other property companies around China are similarly beleaguered. The Chinese press says that in September around 100 homeowners in the eastern city of Hangzhou stormed into the offices of Vanke, a big developer, to demand compensation for falling prices. In March a company in the southern city of Shenzhen (pictured above) caused a stir after it cut prices by 20%, by coughing up the difference to about 25 previous buyers of its property. Others have resisted giving cash, but have tried to calm homeowners by offering discounts on management services.

International Herald Tribune: Chinese banks brace for housing aftershock

As in the United States, Britain and Spain, the real estate bubble in China has turned into a bust in many cities; only one of the two dozen towering cranes at projects near Liu's home was in operation one recent afternoon.

Banking experts and economists expect the bust to produce, by next spring or summer, a sharp increase in loan defaults that could erode the high profits earned by Chinese banks over the past three years.

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"Real estate developers are threatening the People's Bank of China, saying, 'If we die, the banks die first,"' said Yu Yongding, a former member of the central bank's monetary policy committee and now an adviser to the cabinet.

According to Yu, developers are exaggerating the dangers that bankruptcies could pose for banks. "If the government bows to this kind of pressure, we lose all the benefits of what we did before" to control inflation, Yu said.

Paradoxically, the relative lack of sophistication of the Chinese mortgage system could keep its real estate bubble from expanding into a credit and financial crisis like the one that has engulfed the West.

Wall Street Journal: China Aids Home Buyers to Curb Impact of Slump

BEIJING -- China's government is racing to make sure one of the world's biggest housing booms doesn't turn into a bust.

How the swoon in housing plays out in coming months may largely determine how severe the nation's economic slowdown during the global financial crisis will be -- and how acute the world-wide repercussions of the slump will be, as China's demand for construction materials declines.

Construction workers demolish old buildings to make way for a new property development in the center of Shanghai.

While housing bubbles around the world have burst, China's market has been seen as different because its surge in home building has been driven less by financial leverage than by real demand from a rapidly urbanizing population. Anywhere from 15 million to 20 million people move to Chinese cities each year.

But sales of new housing in China have plummeted in recent months as buyers have been spooked by a deteriorating economy and weakening prices.

Here is the interview:

China real estate market slump: Q&A with Gady Epstein [Danwei]

Has the Beijing property slump described in your article continued?
Yes. Prices are supposedly holding steady (or even going up), but the key figure to watch for is transactions. No one's buying apartments, no one's signing big leases on office space. The secondary market for apartments looks ugly as well.

Is it going to get worse?
I think it will definitely get worse in the short term. The central government has just announced measures intended to prop up the housing market, including a lower down-payment requirement, but it's obvious that the public has lost confidence in the market and is taking a wait-and-see approach. People no longer assume, as they did for much of the last five years, that buying an apartment is a can't-lose investment.

How will the global financial crisis affect the Beijing property market?
In the short run, it will have both a psychological and real impact, as people and companies delay big purchasing decisions either because they're nervous or because they're short on cash or credit.

In the long run, the world could look to China to lead the recovery, and it's possible that a year from now, people will be talking up real estate in Beijing again. I suspect we're looking at more like 18 months to two years, in part because the financial crisis will continue to play out for some time. But it's impossible to see that far ahead. Many have looked foolish in the past for betting against China, just as quite a few people looked foolish for betting only 12 months ago that the Chinese stock market would keep going up.

Is there any danger in China of slowing economic growth leading to foreclosures on a large scale?
There is a danger of this in the next year, as homeowners begin to see their home values fall below their mortgage balances. But personal savings are high in China and the mortgage market is not as wildly creative as in the U.S, so the danger, while real, is not a systemic threat along the lines of the U.S. sub-prime disaster.

Most economic analysts who watch China agree on one thing: the long run picture — five, 10 years from now — looks good for Chinese real estate. That's because of ongoing urbanization and because there are still few places for Chinese to park their money, besides banks, the stock market (!) and the art market (!!).

I tend to agree with the interviewee's answers although I would tend to be a little more pessimistic. Once burned it will take a while before trust in the housing market returns.

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Kidnapping now part of doing business in China?

The FT report on yet another "cost" to doing business in China. This is publicity that China could do without I am sure but I suspect this is the this end of the wedge.

The problem of Chinese customers defaulting on previously agreed deals will also lead to large losses for some importers.

Kidnap alleged in China dispute [FT]

A British scrap metal company has accused Chinese customers of abducting its chief trader for ransom in a case that underlines the challenges of doing business in China.

Goldarrow Metals alleged that Anil Srivastav was seized from a Shanghai airport this month and held for days in a small hotel in the eastern port city of Ningbo.

The company said it was forced to send shipping documents worth $350,000 to Ningbo Yibao Import and Export, a customer, to secure Mr Srivastav’s release after local police and British consular officials refused to intervene.

The affair comes amid mounting friction in the international scrap metal trade caused by a slump in commodity prices. Tens of thousands of tonnes of imported copper and aluminium scrap are reported to be sitting in Chinese ports after local companies defaulted on deals.

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The embassy in Beijing said it did not become involved after concluding it was a business dispute. Ningbo city police confirmed they had been involved in a case involving Guanghe and a foreigner but declined to give further details by telephone.

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Will Hutton on the crisis to hit Asia and China

A thought provoking piece by Will Hutton of "The state we are in" fame in the Tehran Times (of all places who took it from the Observer) addressing the myth that Asia will bail out the global economy.

He makes some good points using simple statistics and logic. Whilst I thought Will's book on China was rather poor this article is on the right track.

He is right to point out the massive level of toxic bank loans from banks to failing companies. They are failing now and it will not be long until this feeds through to a bankng crisis in China and more bailouts.

Will Hutton also touches on the "social unrest" problem that will occur at growth rates of less that 8%. This is coming and it is coming soon.

If 7 to 8 percent growth is better, it will still not stave off a sharp increase in unemployment. Already there is an explosion of what the Chinese call 'incidents' -- social unrest. As the Ministry of Labor has warned, China needs to create jobs with sky-high growth rates if it is to retain social stability.

The article is worth reading in full.

Don't expect China to get the West out of this mess [Tehran Times]

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The first is that Asia, except Japan, remains in essence a subcontractor to the West. Two-thirds of China's exports, for example, are made by foreign companies who essentially reprocess imports of semi-manufactured goods that are then shipped to Europe and the U.S. It is an economy that does not innovate -- it is the great copier and counterfeiter of Western technology. This may change over the next 200 years, but not during the lifetime of most of the people reading this column.

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Nor is Asia set to prop up the shattered Western economy. This is the other fashionable notion peddled until recently. Asia is now so strong and independent of the West, ran the argument, that it has 'decoupled'. It would carry on spending and producing, so partly underwriting the world economy and ameliorate the worst of the coming recession.

Asia's terrified financial markets, coming to terms with their region's vulnerability, are now testimony to this profound misunderstanding. Asia is an exporter and saver, of which the best example is China. It consumes a smaller proportion of GDP than it saves, with total consumption lower than Italy's. If its exports stagnate, as they have with the rise of the renminbi against the dollar and the slowing of American spending, then its economy slows down. The rate of growth has dropped by a quarter over the last 12 months and there is every prospect of a further sizable drop over the next 12.

Nor can investment rise to fill the gap. China is saturated with ports, highways, steel mills, cement and petrochemical plants that operate at a fraction of capacity. As the realization has grown that capacity has run far ahead of now falling demand, China's bubble economy has burst rather like our own. Its stock market has crashed and property prices are collapsing. The manufacturing heart in the Pearl River area near Hong Kong is being destroyed. Half the 2,200 factories in the shoe industry have shut, as have a third of the 3,600 toy factories.

China's ever-growing demand for raw materials is easing. Although the Chinese government says its sheltered banking system is insulated from problems in the West, last week top Chinese investment firm CITIC reported a $2bn loss from taking 'unauthorized' positions in the derivatives markets. China's banking system is a house of cards, with billions of dollars of toxic loans made at the party's request to loss-making enterprises set against tiny amounts of core capital. Some unexpected losses and the results could make the West's financial crisis look tame.

The party is acutely aware of the risk, lowering interest rates and considering a big boost in infrastructure spending. Outsiders seem perplexed at the alarm that growth may subside to 7 percent next year; would that Britain and the West will be so lucky.

But bear in mind two key facts. China managed to grow throughout the Great Leap Forward and Cultural Revolution at nearly 5 percent per annum. The bulk of the adult population still farms tiny plots of hopelessly unproductive land in grinding poverty. All it takes is a tiny fraction of its workers moving from doing nothing in the countryside to doing something in the towns deploying modern technology to produce growth. In these conditions, only 5 percent growth is a crisis.

If 7 to 8 percent growth is better, it will still not stave off a sharp increase in unemployment. Already there is an explosion of what the Chinese call 'incidents' -- social unrest. As the Ministry of Labor has warned, China needs to create jobs with sky-high growth rates if it is to retain social stability.

In which case it must change. It has to consume more and become more innovative and productive. But communism stands as a roadblock.

The party is considering an amazing concession - allowing peasants to be able to buy and sell long leases on their land. This would be the biggest step towards granting property rights to 730 million rural peasants since the Revolution. The reason? The party needs them to use their land as collateral to save less and spend more. It is political dynamite, removing one of the key props of the party's support - its control of villages and land rights. But it must be considered. China is beginning the perilous path to becoming freer because the economy demands it.

Then there is innovation, where its track record is abominable. China accounts for only 0.1 percent of the world's patents that apply in Japan, the EU and the U.S. Economists believe the invention of general-purpose technologies, like the internal combustion engine, internet or airplane, that have massive general application, holds the key to growth and will accelerate in the decades ahead. Not one of this century's general-purpose technologies will be made outside the West and Japan, which have held a monopoly for 300 years. Their lead will widen rather than narrow.

The Chinese government knows it must unblock control of universities, laboratories and business if China is to change this dismal prediction and create the subtle combination of freedom to experiment and incentives in which innovation flourishes. Meanwhile, the West's financial travails are not for ever. Once they are solved, the West will be back, exploiting its capacity to innovate.

Authoritarian Asian capitalism is not about to triumph over the Western liberal variant. China needs to change profoundly if it is to join the first rank of nations as their equal. Meanwhile, don't look to it -- or the rest of Asia -- to soften recession. The West made this mess. It must clear it up itself.

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Big Carnage in Big China: crisis fallout continues

The idea that China could escape the global downturn was always a myth as I have attempted to bang on about in this blog.

We have all heard about factories closing, workers being fired and house prices falling.

But is this just the beginning? Silk Road International Blog have an excellent post on this looking at the effects at "ground zero".

So, How Does the Carnage Look from Ground Level? [Silk Road International Blog]

I spoke with NPR again this week about the “feeling on the ground in southern China.” And while I can’t speak for everyone, I know what I’m seeing across a large spectrum of industries and in a number of cities.

Basically, the euphoria is over. Lack of any real press for the first 8 months of the year and no 3Q numbers until this last week meant that China thought it was immune from the global slow down. Um, it’s time to wake up from the artificially induced “one world, one dream.”

What happened in the US with homes happened in southern China with export factories. They mortgaged their future on the promise of continued growth and now it’s all gone and debts are higher than the value of inefficient factories and increasingly inexpensive labor.

With growth at 9% people are worried. On the street that means a couple of things. First spending will drop and conservative Chinese will save even more. The domestic stock market scared millions of investors 9at least twice in the last decade now) and the US crash compounded that fear. I don’t believe that the domestic economy is as impressive as the govt says. It has never been the savior that MNC’s have dreamed and it’s not going to save the GDP this next year either. People aren’t spending, they aren’t investing, the housing bubble is popping. The milk scandal has totally obscured any of the positives that the 0lympics created. And it just keeps getting worse.

The article then gives 6 good reasons why things are bad and getting worse.

Finally, in point 4 the author of this post alludes to my previous post on the "great social unrest" mystery (see previous posts). We appear to agree on this one.

If I was a betting man, I’d put money on 4Q numbers being below 8.5% and next years numbers even lower. (Honest numbers will be below 8.5% for sure but “official” numbers will not be that low because of the need to control a bit of the domestic collective psychology—like the US will never have another “great depression” because it sound’s so awful, 8.5% is the magic number that has to be hit just to keep the new entrants into the workforce employed in China. A drop below 8.5% and people will start thinking ‘89 again.)

I will like the author to elaborate on what he means by this final statement.

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Hidden costs of coal - $250 billion?

China's reliance on coal is a major contributor to global warming. However, there are also other costs that are incurred closer to home.

What this article does is to highlight the real problems that result from China's reliance on coal. What is also abundantly clear is that there is no simple solution. Demand will keep growing despite any global slowdown and there are few alternatives.

A global solution to the emissions of greenhouse gases is still a long, long way off and this article provides a clear illustration of why.

Hidden Cost Of China's Coal Is $250 Bln – Survey [PlanetArk]

BEIJING - China's dirty and dangerous coal mining industry cost the country a hidden $250 billion last year in lost and damaged lives, wasted energy and environmental devastation, according to a survey launched on Monday.

Pollution affected water, land and air around mines, thousands died and many more were hurt in mining accidents, and acid rain-causing sulphur dioxide and mercury were among dangerous emissions when coal is burnt in factories and power plants.

None of this is reflected in low coal and power prices, according to "The True Cost of Coal", researched over three years by Chinese economists and environmentalists.

"Behind China's large production and consumption of coal ... lie expensive and worrying environmental and social costs," their report warns.

Tariffs would need to rise by around a quarter to reflect the real burden for Chinese society, which in 2007 was 1.7 trillion yuan (US$254.9 billion), they say.

"Currently these costs are paid by the people in China suffering from the damage," Mao Yushi, one of the report's authors and chairman of the Unirule Institute of Economics, told a news conference at the launch of the report.

Experts from the coal heartland of Shanxi province, Peking University, the government's top energy think-tank and the Chinese Centre for Disease control also contributed research.

Last year nearly 3,800 miners died in explosions, flooding and other underground accidents. Although that marked a 20 percent decrease from 2006, it is still the most dangerous mining industry in the world.

For a country short of water and struggling to keep its food and air safe, it is also an environmental liability, said Yang Ailun from Greenpeace, who helped coordinate the report.

Each tonne of coal produced means 2.5 tonnes of water are polluted, while coal mining waste makes up some 40 percent of the country's solid industrial waste, she said.

NO END TO COAL

The key problems identified by the report are government regulations that distort prices and weak oversight that allows miners to get land cheaply, dodge safety and environment laws and ship their coal in dirty, dangerously overloaded trucks.

Extra taxes, stricter enforcement, and an end to the price caps that have kept electricity temptingly cheap would make coal prices more realistic and curb waste, deaths and the worst pollution, the report said.

The good news for a country that relies on the dirty fuel for more than two thirds of its energy is that the big price increase it calls for in the long term would mean only a tiny hit to the economy as efficiency soars and green energy firms prosper.

But for those who dream of a future powered only by windmills and dams, they warn that coal will not lose its dominance in China for decades. The report says the 23 percent price rise it recommends would cause only a 7 percent fall in consumption.

China is already the world's biggest producer and consumer of coal, which provides a cheap, domestic energy source at a time when volatile global oil markets have exacerbated worries about tight supplies.

Demand is growing so fast that its miners have to produce an extra 200 million tonnes a year to keep up, or the equivalent of the entire coal mining industry of major producer Indonesia.

A slight decline in consumption, in place of this frantic expansion, might give the industry room to improve their standards without starving the country of energy.
(US$1=6.845 Yuan)

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Are poor transport networks a brake on China's growth?

Another artice from the recent "Doing Business in China" series in the FT.

In my research where I control of transportation networks odd results are thrown up due to the geography of China and the differences in quality of network across provinces especially for rail.

Whilst certainly true that poor transport networks can act as a brake on growth, I would imagine that China is in a much better position that the perceived competition from India or more recently Vietnam where transport is certainly in a worse state than China. The investment in transport in China in recent years has been enormous and whilst a lot remains to be done China is well on the way.

It is interesting to note how the way the road network operates leads to an increase in bribes and theft. Regulations clearly make this worse than it needs to be.

Missing links [FT]

Distribution and the moving of goods remains one of the biggest headaches for almost every company looking to sell products across China.

The principal reason is the uneven development of the country’s transport sectors, with extremely high spending in some regions and sectors – above all, on the country’s expressway network – but poor overall co-ordination.

The outcome has been not just a hugely fragmented transport industry, with barely any logistics companies offering nationwide services, but also one of the world’s most expensive logistics sectors, with transport and related costs accounting for more than twice the share of gross domestic product as in the US, and about four times as much as in Europe.

On the plus side, provinces across China have spent enormously on developing an expressway network – from having less than 10,000km a decade ago, the country’s total length has grown to 78,000km, second only in total length to the US.

This roll-out is set to continue under a master plan that during the next three decades should see every city with 200,000 or more inhabitants linked into the network.

Ports have also seen heavy spending, especially around China’s main export manufacturing locations: at Shenzhen in Guangdong province, around the Lower Yangtze Delta region centred on Shanghai and at Tianjin, Qingdao and Dalian in the north and north-east.

And the country has some of the world’s biggest and most modern airports, notably at Beijing, Pudong in Shanghai and Guangzhou.

With these three elements in place, China has an excellent infrastructure for importing inputs and materials and exporting finished products – by air, if necessary, as well as by ship.

The country also has some excellent regional networks but its transport shortcomings are exposed when a company tries to move goods from one part of the country to another – links between provinces and major cities remain surprisingly poor.

The most obvious weakness is the country’s rail network, whose total length has barely grown in the past five years.

China’s transport shortcomings can be attributed to a lack of central co-ordination and the large number of competing bodies involved in overseeing the transport and logistics sectors.

Railways, aviation and road each fall under separate ministries or central government commissions: the Ministry of Commerce is responsible for licensing various logistics and other transport services; the National Development and Reform Commission, the state’s main planning body, aims at co-ordinating transport policy but has to fight turf wars with the other local and state entities; and China’s customs and State Administration for Industry and Commerce (the latter with both central and local arms) are also involved in regulating the movement of goods.

Throw in a decentralisation of administrative power that has taken place in the past two decades, and it is unsurprising that while China’s richest regions have successfully been able to fund their own infrastructure programmes, central officials have struggled to impose their will in getting different parts of the country to work together.

Making things worse are a series of additional factors that seriously hinder the movement of goods, and make the whole process a lot more expensive.

First, is that road haulage is an intrinsically more expensive and inefficient way of moving large volumes of goods long distances than railways.

Second, are road charges. China now has 70 per cent of the world’s mileage of toll roads, according to the China Supply Chain Council, which local governments have to levy in order to fund their road-building projects.

And then there is local protectionism, with provinces or cities discriminating against transport and logistics firms from other parts of the country.

The consequence of these factors are multiple changes of goods from one trucking company to another, multiple payment of fees at provincial and city borders, and lots of trucks making empty return journeys.

Such practices, of course, all encourage the demanding of bribes, create opportunities for petty theft, make the tracking of goods all but impossible and – arguably most important of all – build in long delays.

The good news is that improvements are coming. Expenditure on railways has been lifted. This summer saw the opening of a high-speed rail link between Beijing and Tianjin, and at the start of the year work began on a 1,300km high-speed route from Beijing to Shanghai, scheduled for completion in 2013.

Plans have also been announced to increase the total railway length to 120,000 km by 2015 (advanced from an original target of 2020) – a credible figure given that expenditure has been raised to more than £23bn a year, up from an average of less than £9bn a year in the first five years of this decade.

And there are also signs that the central government is looking to exercise tighter control over both planning and funding, and an opening of the logistics sector to greater foreign participation, which between them should both lower barriers between provinces, raise managerial standards and see increased investment in the soft side of the transport industry.

Nonetheless, given the time that it will take for the planned new rail lines to come into operation, a continuing shortage of experienced logistics managers, and the almost certain continued prevalence of local protectionism, distribution is going to remain one of the main obstacles to companies doing business in China – whether Chinese or foreign – for at least a decade.

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The Great "Social Unrest" in China mystery

In my recent experience with Chinese economists I have found them and indeed other academics with an interest in China remarkably reluctant to mention the "social unrest" word in conjunction with a global recession.

Given China's reliance on exports and the number of jobs China has to create just to stand still each year coupled with an increasingly brave populous not (as) scared to speak out it appeared to me that the conditions for "social unrest" were aligning themselves nicely.

Yet this element seems to be absent from serious discussion. Clearly China is still well positioned to crush any unrest but with the eyes of the world increasingly on them it may not be as easy as in previous decades.

It was reassuring therefore to read in this week's economist that someone, somewhere has put a number to the issue. The Economist's number just so happens to match mine.

This means we are getting close. All eyes on China.

Here is the quote in the lead article "Into the Storm" looking at how the emerging world will cope with the current "global downturn" or as I prefer to call it "cliff jump".

In many places—eastern Europe is one example (see article)—financial turmoil is hitting weak governments. But even strong regimes could suffer. Some experts think that China needs growth of 7% a year to contain social unrest. More generally, the coming strife will shape the debate about the integration of the world economy. Unlike many previous emerging-market crises, today’s mess spread from the rich world, largely thanks to increasingly integrated capital markets. If emerging economies collapse—either into a currency crisis or a sharp recession—there will be yet more questioning of the wisdom of globalised finance.

Among the giants, China is in a league of its own, with a $2 trillion arsenal of reserves, a current-account surplus, little connection to foreign banks and a budget surplus that offers lots of room to boost spending. Since the country’s leaders have made clear that they will do whatever it takes to cushion growth, China’s economy is likely to slow—perhaps to 8%—but not collapse. Although that is not enough to save the world economy, such growth in China would put a floor under commodity prices and help other countries in the emerging world.

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