Friday, July 21, 2006

Tapering of China's property boom 0 comments



(P.S: Sorry for any disturbances the advertisements above may have caused you)
China has announced another 10% annual growth, which is probably one of the longest sustained booms it has experienced since the booms and busts of the 1990s. Rapid growth has brought with it a different set of problems, and key among them must be social.

Given the increasing income disparity between the rural and urban population, amid a rapidly growing acceptance of capitalism, it is inevitable that there is mass migration into the cities. Add the foreign influx of businesses and their associated white-collar workers. Juxtapose all these to the existing city-dwellers. The real demand for residential housing obviously is there and will keep growing as China's economy continues to develop. Now add the speculative element as foreigners buy up China property in anticipation of prices continuing their stratospheric ascent with the additional plus factor of possible medium-term renminbi appreciation. No wonder the Chinese government is worried, and has been taking steps to curb the speculative element.

Recently the Chinese government has begun raising interest rates, and just this week has followed it up with a series of curbs bordering on administrative controls, including the prohibition of foreigners buying into the residential market, and strict limits on the development of high-end housing, effectively tightening controls on both demand and supply side.

That the China government's moves are so closely watched can partly be attributed to the fact that China is such a growth driver for the global economy. The other reason is that for all the growth of private entrepreneurship these few years, economic control is still top-down. It is difficult to call a peak on the China property market, given that in the past few years the China government has similarly attempted to control property prices to little avail. However regulatory focus on this segment of the economy will constitute a strong headwind --- hence my view that the property boom will taper off. Over the long-term, the government is committed to reducing social inequality --- a corollary of its "sustainable development" policy in its recent Five-Year Plan (see "China looks inward and downward"). Ensuring that Chinese citizens will have affordable housing and are not bid out of their home markets by foreigners will be a key policy focus (those in doubt can look at why the recently departed Lim Kim San was so respected --- he brought affordable housing to the masses).

The property segment most affected should be the residential segment, in particular the high-end which has seen influx of foreign money. Commercial, retail and industrial property should not be hit badly. Losing all these cash cows at one go would hit the municipal governments badly --- they have lost taxing power under the central government, and yet are expected to increase social spending; land sales has been a major money-spinner for them. High and rising commercial and industrial property prices will not generate as much social friction as unaffordable housing (although they do create higher business costs for local entrepreneurs).

It would make sense to avoid property stocks with heavy exposure to the Chinese property market. Capitaland and Keppel Land were downgraded in the wake of these administrative measures but surely these are not the most heavily exposed. There are one or two pure China property plays, some which have listed recently. These are the dangerous ones.

 

 

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