Angus Nicholson writes: In 1987, a young man quit his job at the Hebei Oil Pipeline Bureau and went to seek his fortune in the nascent private property market of Hainan province’s Special Economic Zone. He was Pan Shiyi, now chairman of SOHO China, and one of China’s first private property developers. But he also experienced modern China’s first big real estate bust, when Hainan property prices crashed back to reality prices following a 1992 bull market inspired by Deng Xiaoping’s Southern Tour promoting his ‘reform and opening up’ policy platform.
Hainan is again at the forefront of a Chinese property slowdown.
Hainan may be an extreme case, but China’s property market will not return to its glory days of unrestrained growth.
The March figures from China’s National Bureau of Statistics (NBS) suggests that China’s property market slowdown will continue through 2015.
Construction starts that saw the most dramatic drop. Starts have dropped to their lowest level since October 2009, just before the Chinese government’s enormous 2009 stimulus package. This points to where the property slowdown is being felt most acutely, in new investment. Developers are now far less willing to invest in new projects and believe the market environment has shifted dramatically.Yu Liang president of major Chinese property developer Vanke Group, states that while government policies will help support the market, he is not expecting a major rebound. Yu thinks we have seen the end of the ‘Golden Age’ of the Chinese property market.
As if in unison, as the property market began its outright decline in the second half of 2014, China’s equity market sparked into life.
While the Chinese government does not control China’s stock markets, they are highly driven by policy changes. The share of bank financing in China’s financial sector and the associated concentration of risk has been a major concern for Chinese policymakers. The need to diversify risk across the financial system has driven the Chinese government’s support of corporations pursuing direct financing through China’s financial markets.
What the Chinese government really has little influence over is Chinese investors’ hunger for capital growth. With limited avenues for investment, Chinese investors often pile into asset classes all at once.
New brokerage account registrations and margin financing have exploded.
These are figures that would strike fear into the hearts of most central banks. But the People’s Bank of China (PBOC) is already battling on a number of fronts. The slowing economy, steady capital outflows and the disinflationary trend has tightened domestic liquidity.
This has lead the PBOC to begin, in the words of ANZ’s Liu Ligang, ‘an aggressive easing cycle’ with the weekend announcement of a 100 basis point cut to banks’ reserve requirement ratio (RRR).
How the government manages the equity market boom without precipitating a dramatic crash will be one of the most important stories for China in 2015. In the current environment one can sympathise with investors like Pan Shiyi who are diversifying into overseas assets.