At the recent Olympic Games China was cast into the limelight and came under massive scrutiny on a number of fronts. There was the country’s record on human rights, the cost of the Games and concerns about the rumoured cleanup phase ahead of the Games to give the best impression to the watching billions. But more than ever before China is now a place international property investors are looking towards, a place where many are predicting a great future but what is the real truth? What is happening under the surface of this very private nation?
Background
While the impression that China is still very much a closed shop to many countries from the West is not altogether true there are still some elements of the regime which pride themselves on a controlled environment and strict governmental controls. However, while this has worked fairly well on the economic front and led to something of a two tier system which incorporates strict controls in some areas of commerce and an almost westernised approach in others, there are failings.
The Chinese property market is not only an integral part of the investment scene in the country but it is also vital to so many different areas of the economy. When you consider that there has been a massive shift in property ownership throughout China of late it will come as no surprise to learn that almost a quarter of fixed asset investment is in the property sector and the sector supports more than ten percent of work force. A slowdown, or worse, in the property sector has potentially far reaching consequences for the Chinese economy as a whole, an economy which has been and continues to be so resiliant in the face of international pressure.
Economic growth has never been better and even in the face of the global slowdown the Chinese economy is still expected to grow by some 9.6% this year (compared to 11.9% last year) but behind the scenes it may not be quite as rosy as the authorities would like you to believe.
Behind the headlines
While the headlines are all concerned with the record amounts of steel China has been using during the construction of both commercial and residential properties, the growth in international investment in the region and the massive potential for the future, things are starting to take a turn for the worse behind the scenes. The situation is critical but not beyond repair as long as the authorities act in the short term and do not let the problems fester. So what are the problems regarding the Chinese economy?
A number of factors need to be taken into account when looking at the Chinese market which include :-
Dependence upon wealthy investors
Since we began to see the deluge of investors flocking to China there has been a feeling that many of the less well off local community were being ignored in favour of the rich and wealth businesses and investors who could bring substantial income to the country. Now that the initial flurry of western investors has died down and the credit crunch is taking hold the government needs to look elsewhere to keep the sector moving forward.
Financial controls
While China very much portrays itself as a new age economy in order to attract wealthy overseas businesses and investors it is still ruled with a rod of iron. As the initial property boom looked like getting out of control it soon became apparent that new regulations needed to be put in place. This saw the governed introduce minimum down payments and massage mortgage rates higher in order to cool down the sector. However, now the sector has cooled it is in danger of freezing so the authorities are now looking at lowering minimum payment limits and reducing mortgage rates across the board. The authorities hope that this will bring in a new wave of lower paid workers to the sector and allow at least some of the ‘slack’ to be taken up.
Employment outlook
It is no exaggeration to say that the steel industry in China is dependant upon the property sector for ongoing development projects. The fact that steelmakers throughout the country have announced a 20% reduction in steel production this month has given many property investors a short sharp shock. This level of reduction will see a number of workers lose their jobs which will have a knock on affect to the whole Chinese economy and if it were to continue for some time things would only get worse.
Property price reductions
While it would be wrong to suggest that panic has already set into the Chinese property market, reports of price cuts of between 15% and 35% for apartments in some of the more popular areas of the country do not bode well for the immediate future. If this move to lower prices was to turn into a rush for the exit then it would take some serious manipulation by the Chinese authorities to get the sector back on track in the short term.
The immediate outlook
Alarming as the above comments may be it is interesting to see that the Chinese authorities are set to act sooner rather than later to support the property market. What started as a number of minor concerns about the set up of the sector and the dependence on overseas investors could soon snowball into a major slowdown if it is not nipped in the bud.
The proposed lowering of the minimum down payment limit and a reduction in mortgage financing costs would bring literally millions of more potential home owners into the picture. This in turn would see them pick up some of the slack which has started to appear. That is not to say the either the Chinese economy or property prices can continue to move ahead at recent rates, as there must be a period of consolidation, but at least the authorities should be able to avert a collapse in confidence which would have far reaching consequences.
The long term picture for the Chinese property market is still attractive to those not averse to taking a little extra risk on the political front.