Blog posts by Karine Hirn

The property market only started its existence in the late 90s when property ownership was liberalized and commercial development of residential housing started. Private property in urban areas came as a consequence of State-owned enterprises’ (SOE) restructuring. In order to make money, SOEs started to sell off their property to employees. That was the start of the real estate market in China. After a number of years of very high growth the market is now slowing down. Right now the general mood is extremely bearish, with many doomsayers predicting the collapse of the property market in the coming months.

The property market means a lot to the Chinese economy, because it means a lot to the Chinese people. Many people see property as their preferred asset class, and Chinese saving rates are very high, due to the absence of safety net. Since there is a lack of investment alternatives (bank deposit rates are low and the stock market has been disappointing), the Chinese tend to see property ownership as a safe bet, especially considering the fact that the property prices have kept going up for many years.

Home ownership is very high at 80%, also in part due to what is called “mother-in-law economics”, i.e. a young man must own an apartment to get a wife, and the competition for ladies is high in a country where gender balance has been distorted due to the one child policy. Which means that parents will find it very natural to buy an apartment for their son at an early stage - provided they can afford it which becomes less likely when prices surge.

When talking about preferred asset class, I don’t suggest that the property market is dominated by investors or by speculating patterns. Actually, research shows that only 15% of all property transactions are done for investment purpose, when people buy, betting on making a gain by selling the property (usually left empty or even core shell) after some time. In a country as big as China, it is difficult to know how accurate statistics are but this figure is more or less in line with what we can see and what we hear when visiting property development projects in different cities.

A group of investors looking at a new residential property project.

On top of this, the property market development has big implications for a number of other sectors, not only inside China. What comes first to mind is obviously commodities: the construction pace of residential housing has been gigantic. China is the place where the equivalent of one Rome is built in two weeks; wherever you travel in China you won’t be able to ignore the construction cranes and concrete- and steel-hungry building sites.

But other sectors such as consumer goods are affected by the temperature of the property market, not only the ones related to home equipment such as furniture and white goods but also for instance cars. The correlation between new auto sales and property sales is very strong, this correlation should however be analyzed in view of policy incentives or policy restrictions that have been affecting both sectors at the same time. Then you can also draw the line one step further and remember that the local governments are very much dependent on land sales to finance their expenditures and the slowdown of property market can jeopardize their budget. Banks are also exposed to the property market, but the degree of vulnerability varies from one institution to another.

It is clear that the property market in general is softening. However there are many data points and sometimes it is very confusing. Many commentators ring alarm bells very loud, looking at weekly data and forgetting that the demand-size of the market is actually not leveraged that much. But they also seem to omit that prices are down or have stopped increasing mostly for new projects, while prices for existing properties or more centrally located new projects are still holding up quite well.

The most dramatic decreases in transaction volumes have been seen in the larger cities - for example, transaction volumes in Tier 1 cities went down 19.5% in 2011- that only account for a small part of total transactions nationwide- where several measures, the toughest in the history of the Chinese property market, have been strictly implemented to cool down the market: different home-purchase restrictions (enforcing high down-payment requirements, limiting the number of properties per head, excluding non-locally registered buyers) and other measures through the banks (reduction in mortgage loans and reduction in credit to real estate developers).

The problem is that many so-called nationwide statistics exclude the smaller cities even though that’s where the bulk of transactions take place – for example the closely watched housing data from the National Bureau of Statistics cover only 70 cities. Prices and number of transactions in the so-called Tier 3 cities where 55% of the urban population live do not show signs of collapse.

The authorities have made it clear that they intend to keep curbing on the property markets that have overheated. They have partly succeeded. Our recent visits to projects in Shanghai and on the southern island of Hainan clearly indicate a drop in the number of transactions as people expect new residential property’s prices to go down. But when travelling to cities like Wuhan or Chengdu, one gets other impressions. In such cities there seems to be such a booming local economy and increasing disposable income, implying continuous strong demand for residential housing in the long term.

The question now is how far the tightening will go and what implications there will be for the property market itself and for the whole Chinese economy. China has embarked on a rebalancing act to promote domestic demand in order to diminish its unsustainable dependency on external trade and fixed asset investments. At a time of weak global demand, internal weakness can make this rebalancing act more challenging.

Our investment team follows very closely our carefully-selected holdings in the property sector. They are solid companies, with good geographic distribution of their portfolio, better access to financing than many other developers and that might even benefit in terms of increased market share and participation in the consolidation process in the sector. Valuations are historically low and there have been a lot of share purchases by insiders over the past several months. The investor sentiment is however very dependent on policy headwinds, so the coming months will prove to be extremely interesting for the real estate sector, and all the sectors affected by its temperature.

It is true that nowadays, China makes the headlines around the world almost every day; and multinational companies are starting to put the world’s second largest economy at the centre of their strategies. It is becoming common for people that I know here who work as country managers for multinational companies to have to report directly to the CEO in Europe or the US, unfortunately implying many sleepless nights spent on conference calls and intercontinental flights.

For journalists, like many expats living in China (myself included), it is obviously exciting to work in a place that gets so much attention and for good reasons, that is rapid expansion and not street riots. But there is a downside to this newly-gained focus; news coming from China almost always brings with it anxiety, and it is striking how rumours, bogus news and misguided interpretations about what’s going on in this country float around, both inside China and abroad. It’s good that we are a team on the ground in Shanghai that can do our own research work and cross-check all information.

In China, the pace of change is very fast. And there are, after all, not that many people following and understanding this country. Could this be the reason why there are such extreme differences in interpreting what’s going on here? Indeed, after spending one year in China, I can’t help being amazed at what I call “the bears and the bulls dichotomy” that prevails for every single event or development of some significance.

To illustrate this: China’s third quarter GDP growth rate came out last week at 9.1% year-on-year. It was just marginally below forecasts, but triggered a sell-off in the markets, and alarming headlines about China inevitably facing a hard landing and about its unsustainable investment and cheap export-driven growth model. First of all I would say that 9.1% is good. Secondly, the leaders of the country themselves want the economy to slow down, orchestrating a “slower but higher quality growth”. But had growth been 9.5%, the reaction would have been just as strong: although instead there would be big concerns about China overheating and the risk of further tightening…

Another obvious example is how people read the real estate market indicators, such as prices and inventories. Are prices going down or seeing slow-down in growth? Then the bears talk about the collapse of the property market and huge problems facing property owners, real-estate developers, local governments and the whole of China, while the bulls celebrate the fact that Beijing is succeeding in cooling down the overheated property market, that it might mean the end of the tightening period and that we can nevertheless trust that long-term underlying demand will keep creating massive opportunities anyway . Are prices going up? Then the bears flag up for a “housing bubble”, “ghost cities” and “social unrest”; whereas the bulls would tend to focus on the increasing wealth of the Chinese and the fact that despite tightening, the property market (the largest asset class for the Chinese population) still looks good.

Not only economic development is subject to the dichotomy. On the political side, you will hear those praising the stability of the political regime in enabling better economic ruling at the same time as you will hear warnings that no dictatorship is able to maintain order in a country with surging wealth disparities, an economic slowdown, a booming Internet sector and rampant inflation. Internationally there will be the hopeful ones – may they be governments or companies - expecting a rescue from Chinese knights. And there will be the suspicious minds criticizing the Chinese for opportunistic and/or politically-motivated outbound FDIs.

There is no black and white and there is no absolute truth. One thing that is for sure is that Chinese demand has become more important given the weakness of the US and Eurozone, and everyone seems to worry more about what’s going on in China. In the long term, increased interest combined with a genuine interest in understanding the underlying trends, is good – China deserves it. In the short term, I really think the bears are getting too much traction and that is one of the main reasons why Chinese equities’ valuations are close to 2008-09 lows. Then again, that creates an excellent entry point for investors that can have a long-term perspective.

Investors around the world, including ourselves, had a tough day yesterday. Considering the somewhat depressed mood I had on my way to work this morning despite a fabulous weather in Shanghai, I got cheered up by reading 50 degrees East, a publication by the international law firm Allen & Overy.

The firm conducted a survey among 1,000 business leaders from major international firms in 19 different countries, and presents in this report a number of very interesting facts and figures. The overall conclusion they draw is that much of the world’s growth will come from China in the next two to three years. Indeed China ranked number one with 44% of votes when respondents were requested to indicate the markets with the best business opportunities. Germany was one of the countries giving very high vote for China, with 69%.

Hyundai factory in Nanjing

China might be the number one priority market, it is also perceived as one of the most difficult ones to penetrate according to the respondents. That’s indeed what I often hear here when speaking to representatives of foreign companies that do struggle a bit.

I recently attended the launch of the annual Position Paper by the European Chamber of Commerce in China, which represents the views of its 1,600 member companies. The Position paper, another interesting report (but 330 pages long!), concludes that the 12th five year plan’s priorities towards a more balanced and sustainable growth model and more open market are very positive, but that several barriers and discriminatory concerns for European companies remain albeit some progresses could also be observed during the past year.

So let’s go 50 degrees east even if not always that easy. I am not a huge fan of surveys but at the end of the day the strategic commercial and investment priorities of major multinational companies in the world might be what matters the most when everything else seems to be up and down.

Chongqing boasts 32 million inhabitants. No, I have not missed a comma in the figure; you’re indeed reading thirty-two million. It is often called “the largest city in the world”, which is actually wrong because it is a municipality (that separated from Sichuan province in 1997) with a territory’s size as big as Austria. It is a must see in China if you want to understand what’s going on in Western China and - I would argue - in this country.

On our way to Chongqing's central business district

“Go West” program
Chongqing is emerging as a major industrial hub, partly due to the “Go West” incentive schemes that the Chinese government has been implementing already for several years. Chongqing GDP grows at 17% per year and Foreign Direct Investment was multiplied by four from 2007 to 2009. 

The goal of this policy, which includes among others tax incentives combined with very large infrastructure investment programs, is to open the inland and reduce regional inequalities with the richer regions of eastern China, that have been boosted in the past by export industries. 

Larger factories push for improved infrastructure
This trend has triggered the relocation of large factories to places like Chongqing, where it is easier to recruit and retain cheaper labor force. These factories can serve the domestic markets as well as export markets, thanks to massive improvement in infrastructure that have been achieved, notably regarding transportation. Chongqing is not only an important hub to reach the western regions of China but also as a starting point for infrastructure network linking with central Asia, Russia, Europe and southeast Asia. 

Starting with airborne transportation; before arriving to Chongqing’s brand new massive airport, I chatted with a Californian pilot on his semi-monthly trip to Chongqing where he flies US freight aircraft back to the US. 

Continuing with boats, Chongqing’s port has become China’s biggest inland river port. Because of the Three Gorge Dam that I also visited on this trip (more about it in a future blog posting) the traffic on the Yangtze River has intensified and ocean-going ships can now reach Chongqing from Shanghai.

Roads and railway transportation have also been developed a lot. For instance a cargo train service to the German city of Duisberg has been recently launched, the first train carrying laptops and LCD screens left Chongqing at the end of June. The 13-day trip means significant time and cost savings compared to the sea trade routes from Shenzhen or Shanghai.

Here Chongqing municipality is planning its newest financial center, reminding us of Shanghai's Luijiazui

Chongqing is evolving – Go East and discover the growth
The new hub Chongqing is evolving and becoming a major production center of electronics; we were told that HP is today the largest tax-payer. In the first 5 months of 2011 Chongqing factories exported 2.4 million laptops. There are also ambitious plans to develop the city as a financial center, with a project in JiangBei district that reminds very much of Lujiazui financial district in Shanghai. 

Next spring, Finnair, as the first European carrier to do so, will open a direct route with an Airbus A340 aircraft four times a week between Helsinki and Chongqing. It will take 8.5 hours. Go East! You might want to wait for the autumn or winter though- summers in Chongqing are extremely hot. And ask me which restaurant to go to and eat an excellent hot pot!