ASIA GUEST COMMENTARY: Who is checking the data?

Foreign investors looking at China property can get easily scared by mainstream media headlines about the Chinese economy. It’s of little wonder given the proliferation in recent months of mentions of ‘stock market collapses’, ‘economic slowdowns’, ‘China volatility’, ‘shock devaluation’, or the old and persistent ‘property bubble’.

Macro indicators such as overall GDP growth estimates, PMIs, exports, electricity consumption, rail cargo volumes or car sales indeed do point to a slowdown or year-on-year declines. Add to that the stock market dropping 40 percent from 5,000 to 3,000 in just weeks and the RMB losing almost 3 percent against the dollar in two days in August, and it is easy to see property fund managers trying to raise or manage China funds having plenty of explaining to do to their investors in the US or Europe.

So this may come as a bit of a surprise to people not watching China closely: residential property markets in China have actually been on the rebound for a couple of months, and not just by one measure.

House prices, as measured by the SouFun-CREIS 100 Cities Index, have been rising month-on-month for four consecutive months, with year-on-year growth turning positive in August, for the first time since September 2014. National volumes of new home sales (in gross floor area) have been up year-on-year every month since April this year. Major developers started buying more land again in June, and also reported positive growth in contract sales year-to-date year-on-year.

The extent of this rebound of course varies greatly by city. Shenzhen, Shanghai and Nanjing rank strongest on price and volume growth among major cities.

Pace of inventory clearing measured in months-to-clear amongst the 20 major cities that foreign investors would mainly care about are at historically low levels relative to each city’s range since January 2012, as low new starts and sharp drops in land sales started to help clear inventory.

Of course things are not all rosy. There are troubled projects on the ground, even if the true distress some have been waiting for never materialized. That’s not to say there wouldn’t be more defaults and ‘missed payment’ headlines. It’s a big market. For many, the financing cost has not come down at all, despite drops in interest rates.

Land prices did not decline in the downturn and, by some measures, they kept rising. It was land sales volumes that dropped. High land prices with falling house prices had squeezed margins for developers and by extension for investors. New short-term supply therefore was limited.

Cyclical easing has been driving the demand. From removal of home purchase restrictions and lower mortgage rates to lower down payment requirements.

Then there is underlying demand, urbanization and, increasingly, upgrade demand. China faces an aging population problem but for property the growth in the 40 year old to 60 year-old segment over the next decade means more middle-age people with money to upgrade their lives, including property.

Will the rebound last? It could well be just another Chinese policy cycle. Market up – tighten and it comes down. Market down – stimulate and it comes up. It’s been like that for years.

At the macro level, you can’t really expect an RMB10 trillion economy to grow in aggregate at 8 percent for long. The RMB move so far has been tiny from a 10-year perspective. That is more a signal it won’t be upwards only anymore. The stock market collapsed, but it’s just back to where it was a year ago, and recent history suggests stock and property markets are unrelated or even negatively correlated anyway.

The real long-term macro concern is debt, and everyone is acutely aware of the problem, with the government setting a debt ceiling for local government debt and helping to convert loans into longer-term bonds. Worries persist when debt problems are solved with ‘more debt’. But that is not a China-only concern.

China is ‘different’, and sensational top-level headlines may contrast with market-specific latest data. Drilling down before formulating strategies for the country is the only way to find answers.