The big winner of housing fears in China? The stock market



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Concerns continue to creep in about the Chinese real estate market, with the Federal Reserve recently warning about it.

The Fed said in its latest semi-annual report Financial Stability Report published on November 8 that tensions in the Chinese real estate sector could strain the Chinese financial system, with “possible spillover effects on the United States”.

On the same point, the attention of this writer has recently been drawn to a downtrend Economist article published at the beginning of last month on housing in China (see The Economist article: “China is shaking (1): The housing complex – How a housing slowdown could ruin China’s growth model», October 2, 2021).

Certainly, there is no doubt that the stellar days of the Chinese real estate market may have reached their peak.

Demographics alone make this point obvious and this author makes no apologies for repeating the point made here before (see To survive the repression of the Chinese market: choose your sectors wisely, 24 Aug 2021), that the biggest mistake the PRC made during the otherwise incredibly successful reforms was not to end the one-child policy many years earlier.

That said, China’s urbanization is far from complete and that is boosting housing as well.

The urban population now represents 63.9% of the total population in China, up from 49.9% in 2010, according to the 2020 census.

China’s urban population as% of total population

Source: National Bureau of Statistics

Meanwhile, a potential housing spike as an engine of economic growth is a very different outcome from a housing slowdown destroying China’s growth pattern.

The central government is deliberately seeking to wean the economy from its dependence on property, just as its plan to roll out a property tax aims to reduce the reliance of local governments on sales of land for individuals. tax revenues.

This is sound public policy, although in the case of property tax it is long overdue.

In this regard, the Standing Committee of the National People’s Congress announced last month the extension of the reform of the property tax to certain pilot towns over a period of five years.

The introduction of a property tax will therefore be a gradual and not a sudden transition.

Meanwhile, returning to the topic of the real estate crisis in China, the same old bearish stories have played out again recently when it comes to real estate in China in terms of empty cities, unaffordable housing, etc.

The problem with such generalizations is that there have always been two completely different Chinese housing markets.

There is no doubt that housing is extremely expensive in larger cities, especially in relation to reported incomes.

Yet all the empirical evidence shows that there is a huge pent-up demand for residential properties in these cities any time the property tightening measures are relaxed.

Still, property appears to be much cheaper relative to income when calculated in terms of national averages.

Assuming an average household size of three people and a unit size of 100 m², the national average ratio of residential property prices to annual household disposable income is 7.6 times, compared to 18 times for the cities of level 1 (see the following graph).

Housing affordability in China (price of housing relative to disposable income of urban households)

Note: Assuming an average household size of 3 and a unit size of 100 m². Source: National Bureau of Statistics, CEIC data

Note: Assuming an average household size of 3 and a unit size of 100 m². Source: National Bureau of Statistics, CEIC data

This reflects the reality that in many small towns of Tier 3 and 4 the problem is less unaffordable property than

excess supply. And this is where the stories of empty cities come from, that said, it must be said that China’s ‘build it and they will come’ model of managed economy has worked remarkably well so far.

At the same time, it should also be pointed out that, from a macroeconomic point of view, the four leading Chinese cities, namely Beijing, Shanghai, Canton and Shenzhen, still represent only 3% of the real estate market as a whole in terms of areas sold, and 10% in value.

In this regard, it is misleading to generalize about the state of the Chinese real estate market based on the inventory in these four major cities.

This has generally been the case, for example, that speculative foam has always seemed to be the most important in Shenzhen, if only perhaps because it sits next to the real estate-obsessed Hong Kong.

And Evergrande, the highly leveraged real estate developer who sparked stories about the “Lehman moment” in China, is, yes, based in Shenzhen.

The point here remains that Beijing can handle the fallout mainly because the central government needs to be prepared for the liquidity crisis since it induced it by its “three red lines” policy discussed here previously (see To survive the repression of the Chinese market: choose your sectors wisely, August 24, 2021).

Meanwhile, when it comes to bubble talks, the majority of Chinese cities in the country still apply a minimum deposit of 30% for first-time home purchases, while a deposit of 30-40% is required. for first-time home purchases in first-tier cities.

The other more general point is that a continued real estate crackdown, or at least the perception that a cap is going to be placed on residential property prices in the future, is not necessarily negative for consumers. Chinese stocks.

Indeed, equities are becoming more attractive as an alternative asset class.

This simple but important point is often overlooked by foreign investors.

China’s path to decarbonization will no longer be a straight line

At the same time, the past few weeks have seen a return of traditional Chinese pragmatism in terms of policy vis-à-vis its recently strained energy sector.

The result will be a much more flexible approach to achieving long-term decarbonization goals in terms of short-term withdrawal from the application of power reduction goals.

Utilities have also benefited from a long overdue relief in terms of the ability to raise tariffs.

Thus, the National Development and Reform Commission (NDRC) announced on October 12 that it would allow the market price of electricity produced from coal to fluctuate by 20% above or below the tariff of benchmark, against an increase of 10% and a decrease of 15%. range.

While all industrial and commercial users will have to pay market prices for electricity, industry specific prices being removed.

This means that power producers can charge higher tariffs for energy intensive sectors such as metals, chemicals and building materials.

The NDRC also recently declared that it will “make full use of all necessary means” to intervene in coal prices in order to promote “the return of coal prices to a reasonable range” and to ensure “the security and stability of the country. energy supply “during the winter. heating season.

Thus, he ordered coal mines to maintain “normal production” even during holidays and major events, issued approvals for new mines, and ordered major coal production bases in the north and northwest. from China to lower prices by 100 Rmb / metric ton.

As a result of these measures, the futures price of thermal coal in China has fallen 57% since Oct. 19, although it is still up 27% since the start of the year.

China thermal coal futures price

Source: Bloomberg

Source: Bloomberg

The fact remains that coal still accounted for 57% of China’s energy consumption in 2020.

China also continues to build coal-fired power plants and remains, for now, a coal-based economy, as the fallout from the recent surge in coal prices clearly shows.

Thus, the provincial governments approved the construction of 24 new coal-fired power plants in 1H21 with a combined capacity of 5.2 gigawatts.

Coal currently represents 49% of China’s 2,200 gigawatts of installed capacity.

This current reality raises the question of President Xi Jinping’s seriousness when he surprised the world in September 2020 by declaring the goal of carbon neutrality by 2060.

The first point to make about this pledge is that Xi has a habit of doing what he says he’s going to do, which is a lesson foreign holders of Evergrande dollar bonds are now learning from the first. policy of the “three red lines”. announced in August 2020.

Yet when it comes to decarbonization issues, Xi is unlikely to be China’s president again in 2060 since he will be 107 by then.

In this regard, the practical point to note is that China’s short-term decarbonization targets are much more modest and therefore more achievable.

The goal of 14e The five-year plan announced in March aims to increase reliance on non-fossil fuels to 20% of total fuel demand by 2025, and 25% by 2030 based on the target Xi announced last December. .

This compares to 15.8% in 2020.

Yet the practical reality to date is that China’s industrial sector remains almost entirely powered by fossil fuels.

That said, China also sees practical positive trade consequences of the world’s growing commitment to decarbonization.

It is the catalyst for growth provided by the increasing adoption of renewable energies.

Here, the most concrete example of commercial success is China’s global dominance in the solar panel market.

How the partition dilution works

China is the world’s largest producer of solar panels with a market share of over 70%, and China’s ten largest solar panel manufacturers are privately owned.

The opinions expressed in Chris Wood’s review on Grizzle reflect the personal opinion of Chris Wood only and have not been reviewed or endorsed by Jefferies. The information in the column has not been reviewed or verified by Jefferies. None of Jefferies, its affiliates or employees, directors or officers will be held responsible of any kind in connection with the content posted on this website.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and / or Grizzle employees hold positions in the company (s) mentioned in the article. For more information, please see our Content Disclaimer.

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