Chinese Property Bubble?

China's latest GDP figures for July-September 2013 show a growth rate of 7.8%, and they are on course to reach the Government set target rate for 2013 of 7.5%. While this is an enviable growth rate for the US or Europe, it is the lowest rate for China in 23 years. Over the past two decades China has enjoyed rates between 8%-14%. The Government has made it known that they would rather a more stable and sustainable growth rate, one which relies more on domestic consumption rather than their export led economy which has given them three decades of surging growth.

China's domestic consumption, or household expenditure, is one of the lowest in the world and makes up 34% of its economy. This is compared to 72% in the US, 66% in the UK, and 61% in Japan. On the other hand, China's investment is one of the highest in the world and makes up 48% of its economy, compared to 15% in the US, 14% in the UK, and 20% in Japan.

China is attempting to rebalance their economy away from investment and into more consumption. One sector benefiting from that policy has been real estate. However as more stories of ghost cities and empty tower blocks begin to percolate out of the country, one wonders has the real estate sector been propped up to help with this rebalancing act and to cushion their decreasing GDP growth numbers.

In most markets a property bubble will eventually get found out and it results in a crash. It's not the most efficient of markets as people do not act rationally, but eventually the truth catches up with them. China has a unique market structure. Its Government is centralized and communist, however they like to portray that their commerce is open and free. This is far from reality. The financial system and most large corporations are controlled by the Government, either directly or indirectly. Local Governments rely on property developers for up to 25% of their income from land sales. Most of the large property developers are either Government controlled, or get financed through State Banks. Therefore the continued building and oversupply of property into the market is being sanctioned and supported by the Government.

The motives for such an oversupply of property development could range from propping up the GDP growth rates, to a belief that mass urbanization will accelerate. The former is a more likely explanation given that some ghost cities built up to five years ago remain practically vacant. Another factor to consider is the Chinese demand for property for investment purposes. 41% of Chinese household wealth is in urban housing stock, versus 26% in the US. The Chinese view real estate as a good store of long term wealth, but how long can they hold that same viewpoint if they own an empty apartment for ten years?

Could an imploding property crash in China cause the third international tsunami, following on the heels of the Banking Crisis and the Euro Sovereign Debt Crisis? A property price correction maybe better insulated in China compared to what happened in the US, as most Chinese investors use large down-payments and are not over-levered. This may insulate the banks that lent the money, but it may not appease a family knowing that they lost half their investment due to tumbling property prices. Whatever the outcome, be it political, social, economic, or all three, the repercussions could be severe and reverberate worldwide.