China’s slowing GDP

The main reason why the Chinese slowdown does not scare pundits more is that they expect China to repeat its past actions by loosening its monetary policy and stimulating its economy as it did in 2009

China is slowing. Its (gross domestic product) GDP growth rate has fallen to 8.1%. Not to worry. Forecasters everywhere are more than confident that the Chinese can stimulate the economy if things start to get bad. This might be true if China was a normal economy, but its strengths can quickly turn into weaknesses. The reality is that they have the wolf by the ears and there might be no way out.

In its latest forecast the World Bank has cut its forecast for China from 8.4% to 8.2%. While this growth rate seems enviable, it is a 13-year low. The Bank also forecasts that the Chinese economy, after a soft landing, will bounce back by the third quarter of 2012. The recovery’s shape would be somewhere between a vigorous ‘V’ and a flat ‘L’. The World Bank also forecast in June 2008 that the US would grow at 1.1%, Europe would grow at 1.9% and China would continue its growth of 9.4%. It also predicted in 2008 that a slowdown in the US would have little effect on China. It was wrong, very, very wrong.

The World Bank’s forecast has lots of support. A recent poll of 15 economists produced a median forecast of 8.3% while the Asian Development Bank (ADB) came in a little higher at 8.5%. Like the World Bank, the ADB’s forecast has been lowered from their report in December.

But it is not just the economic boffins who are forecasting slower Chinese growth. There is evidence from the real world as well. The most telling has to do with commodities. Over the past two years commodities seemed tied to equities. This has changed recently. World stock indices rose more than 11% in the first quarter while the Reuters-Jefferies CRB commodity index stalled, up only 0.2 %. This was reflected in Morgan Stanley’s index of commodity producers whose shares lagged behind other sectors and gained only 4%. The sluggish growth was no doubt due to falling demand from China.

Real estate construction accounts for 13% of China’s economic growth, but the sector is also slowing. Sales transactions in Beijing, Shanghai and Shenzhen are about 30% below levels last December. Investment in property construction growth was up 12% of the previous year in December, but that was half the growth in November. Developers have up to two years’ worth of supply on their books and there are an estimated 10 million to 65 million unoccupied apartments in China.

Real Estate Drags on China Growth, Domestic Consumption Is Bright Spot

Growth in China’s gross domestic product slowed to 8.1% year-on-year in the first quarter of 2012, the country’s lowest rate of economic growth since the first quarter of 2009. On a quarter-on-quarter basis the picture was even worse, with annualized growth dipping to 7.4% from 7.8%, below the government’s 7.5% target for the year.

There was better news on the composition of growth. Responding to a question from China Real Time, National Bureau of Statistics spokesman Sheng Laiyun revealed that consumption spending by households and government contributed an impressive 76% of first quarter growth, up from an average of 41.6% in the last decade.

Real estate was the main domestic drag. The government’s continued efforts to tame bubbly house prices triggered a contraction in sales and new construction of residential property, with the impact rippling across China’s industrial sector.

Affects Of A China Real Estate Crash

You've probably heard many opinions that Chinese real estate is in a bubble. However, much of the prognostication has been backed by hearsay and speculation. Below, I go beyond the hypothetical by illustrating the hard data that demonstrates that Chinese real estate is in a bubble. I will go further by anticipating how investors could potentially profit from the collapse of Chinese real estate bubble.

Most investors value residential real estate using a variety of measures. These include: price-to-incomes, price-to-rents and affordability. Essentially, people buy homes when they can afford the monthly payments.

Comparable sales are also often used, but I think this is the weakest form of property valuation. Arguing an asset is worth $x because a similar asset sold for a $x suffers from pro-cyclicality and becomes a self-fulfilling prophecy.

The first three charts below compare property valuations in the US with those in China and a selection of Chinese cities. According to three measures (price-to-incomes, price-to-rents, mortgage affordability) Chinese real estate is vastly overvalued relative to US housing.

The Chinese housing bubble may already be imploding. Assuming declining home prices drag the Chinese banking sector with it (and with the banking sector, local governments and the credit expansion fueling the Chinese fixed asset investment boom deriving Chinese economic growth) broad-based China-related ETFs, such as iShares FTSE China 25 Index ETF (FXI) or iShares MSCI Hong Kong Index Fund (EWH) could decline in value.

China property market digest, March 19-30

(Reuters) - Here is a look at the latest news, numbers and more from China's real estate market.
The property sector accounts for 13 percent of China's gross domestic product in 2011.

In response to soaring prices, Beijing has rolled out an array of measures since late 2009 to rein in property speculation and has won some success. House prices have fallen from record highs.

But China's vows to keep its property curbs in place have fuelled worries that they may further drag on an economy that is already cooling, and saddle with banks with more bad loans.

March 28 - Chinese developer Evergrande Real Estate said its 2011 net profit climbed 50 percent from a year earlier to 11.4 billion yuan ($1.8 billion) and will keep a sales target of 80 billion yuan for 2012.

March 20 - Guangzhou R&F said its 2011 net profit rose 11.3 percent to 4.8 billion yuan and set a sales target of 32 billion yuan for 2012.
Read more