China Housing The Biggest Risk

By John Richardson

imagesWHEN the blog made the point during a recent presentation that China is still predominantly a poor country, a chemicals industry executive pointed out that it doesn’t feel that way if you visit the Apple store in Hong Kong. If you do, you will see lots of rich mainlanders buying every I-Phone and I-Pad that they can get their hands on.

Fortunately, the chemicals industry executive knows all too well that the Apple store in Hong Kong is far from being a measure of what life is like in China’s poorest province, Guizhou, where per capita GDP in 2013 was just Yuan22,862 ($3,675) – or, of course any of China’s other poor provinces.

But is this ability to see beyond the end of one’s proverbial nose widespread enough to mean that most chemicals companies have the right kind of sales, marketing and product-development strategies? We sincerely hope so, given the reality of income distribution in China and other emerging economies. Companies also need to have considered where the future opportunities lie  in emerging markets as the “wealth effect” from easy credit disappears.

We similarly hope that most chemicals companies haven’t reached the conclusion that all is well with China’s real estate market, having only looked at firm property sales and prices in first-tier cities such as Beijing and Shanghai. The nationwide picture is, again, very different and this more accurate picture is the single-biggest economic risk facing China, as it restricts the availability of new credit.

As this excellent Wall Street Journal article points out:

  • The 200 or so Chinese cities with populations ranging from 500,000 to several million account for 70% of the country’s residential-property sales [these are China’s third- and fourth-tier cities]. In many of these cities, developers are slashing prices and offering freebies such as kitchen furnishings and parking spaces as they try to work through vast gluts of unsold property. Protests are breaking out among buyers angry that their investments are losing value.
  • Even with market strength holding up in the bigger cities, the overall value of Chinese housing sold in the first two months of 2014 declined 5% from a year earlier, government statistics show. Private-sector data indicate the decline continued in March.
  • The construction, sale and outfitting of apartments accounted for 23% of China’s gross domestic product in 2013, Moody’s Analytics calculates. That is up steeply from 10% in 2006 and is higher than American housing’s share of GDP reached during the height of the US housing boom in 2006, Moody’s adds.
  • Further weakness could mean trouble for construction companies and appliance and commodity producers [including chemicals companies. of course]. Furniture and appliance sales in China have been slowing along with the weaker pace of apartment sales.
  • Also potentially affected are businesses that use real estate as collateral to get new loans [which, again, includes chemicals producers  and traders]; China’s banks rely on property holdings as the main collateral securing loans.
  • Another risk is that consumers who are accustomed to seeing steady gains in their homes’ value pull back on spending. This is a danger because an unusually high percentage of Chinese household wealth is tied up in real estate—about two-thirds, estimates economist Li Gan at Texas A&M University. Americans, at the peak of the US housing boom, had only about half that much of their family wealth in real estate.

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