China’s housing market enters New Normal as prices slide

Economic growth

SHARE THIS STORY

D'turn 10Aug14

Markets appear to be continuing to move, slowly but surely, into their expected ‘scary phase’.  The reason is the massive distortions that have been created in financial markets, and in China’s housing market, by the $35tn+ of stimulus from governments and central banks since 2009.

Unwinding these distortions will not be simple.  The stimulus has not returned us to SuperCycle growth levels, but has instead created extreme levels of debt.  And without SuperCycle levels of growth, it is becoming clear that this debt can never be repaid.

The chart highlights how the markets now seem to be breaking down, one by one:

  • At the beginning of 2013, the S&P 500 (purple); the $: ¥ exchange rate (brown); Brent oil (blue); and naphtha (black) were all still moving together
  • This was the famous “correlation trade” under which all markets rose together, due to the amount of market support being provided
  • But during 2013, oil and naphtha markets disengaged, leaving only the $: ¥ and the S&P500 still moving higher
  • A year ago, traders thought they saw an opportunity to reconnect them, using their previously successful ‘buy on dips’ strategy
  • But although they pushed hard with hype about imminent shortages, the reconnection never happened
  • Instead, the yen then became the next market to break the correlation, leaving the S&P 500 on its own

This was the first part of the unwinding of the ‘correlation trade’.

The problem was, and is, that the ‘correlation trade’ meant supply/demand balances in individual markets no longer mattered:

  • It kept crude oil prices at record levels, even though supply was increasing and demand growth slowing
  • In currency markets, it meant the dollar remained weak to support US exports, despite major problems in the Eurozone and Japanese economies

But now the liquidity tap is being turned off as China cuts back lending and the US Federal Reserve completes its “taper”.

CHINA’S ECONOMY IS SLOWING FAST
Most importantly, China’s leadership is moving in a new direction. As a result, its economy is slowing fast.  Railcar movements are always a good real-time indicator of the economy.  They fell 1.4% in June versus 2013, whilst steel production managed just a 0.4% gain in H1.

The key China housing market is also now entering a “New Normal“, according to the head of the National Economic Research Institute.   July saw house prices falling in all 10 major cities.  And as China Daily reports, “Gone are the days when Chinese property developers could make a killing simply by building more houses.

Instead, a new type of market is developing according to Pan Jun, president and CEO of Fantasia Holdings Group:

Don’t call us ‘property developers.’ We should try to be ‘community designers,’ offering comprehensive services to improve residence comfort”

The good news is that China’s new leadership clearly understand what needs to be done, and have developed detailed plans to allow market forces to play a bigger role in the economy.

But it would be naïve to assume this can be done by simply waving a magic wand.  Unwinding China’s past mistakes, as in the West, will be a long and hard road.

 

WEEKLY MARKET ROUND-UP
The blog’s weekly round-up of Benchmark price movements since January 2014 is below, with ICIS pricing comments:

Brent crude oil, down 4%
Naphtha Europe, down 4%.  “Market is suffering from a combination of falling upstream ICE Brent crude oil prices and slow downstream demand, leading to a sharp drop in prices.”
US$: yen, down 3%
PTA China, up 1%. “Squeezed margins restricted the volume of sales, as producers were unwilling to sell below their costs”
Benzene Europe, up 1%Prices fell to a six-week low, reflecting downward movement in global markets and limited demand for August”
S&P 500 stock market index, up 6%
HDPE US export, up 9%. “For now, US prices are workable to Latin America”

PREVIOUS POST

Markets slip as fears grow Fed's cheap money may end soon

08/08/2014

Markets appear to be continuing to move, slowly but surely, into their expected...

Learn more
NEXT POST

Eliminating the impossible in China's polyethylene market

12/08/2014

Markets appear to be continuing to move, slowly but surely, into their expected...

Learn more
More posts
Ageing Perennials set to negate central bank stimulus as recession approaches
10/03/2019

The world’s best leading indicator for the global economy is still firmly signalling recession...

Read
BASF prepares its UK supply chain for Brexit
24/02/2019

BASF has been working with Ready for Brexit (the online platform I co-founded last year) as part of ...

Read
Companies and investors have just 30 working days left to prepare for a No Deal Brexit
17/02/2019

Companies across the UK and EU27 are suddenly realising there are now just 30 working days until the...

Read
The BoE’s pre-emptive strike is not without risk
12/02/2019

The Financial Times has kindly printed my letter below, arguing that it seems the default answer to ...

Read
Flexible working is key to reversing today’s collapse in fertility rates
27/01/2019

Women in most parts of the world are not having enough children to replace our population. This is o...

Read
No Deal Brexit remains UK law unless MPs reverse their previous votes
20/01/2019

“That couldn’t happen” are probably the 3 most dangerous words in the English lang...

Read
CEOs need new business models amid downturn
14/01/2019

Many indicators are now pointing towards a global downturn in the economy, along with paradigm shif...

Read
Chart of the Year – China’s shadow banking collapse means deflation may be round the corner
16/12/2018

Last year it was Bitcoin, in 2016 it was the near-doubling in US 10-year interest rates, and in 2015...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more