China realestate - Google News2015. 7. 17.
"triple bubble" – a combination of the third biggest credit bubble, the biggest investment bubble and the second-biggest real estate bubble of all time
A high-rise construction site in Taiyuan, in north China's Shanxi province. Photo: AP
China is the number one threat to the global economy, analysts say, with an over-inflated "triple bubble" threatening to drag global gross domestic product below 2 per cent.
If house prices fall by 15 per cent or more, then we think that we are likely to get a hard landing and the authorities risk running out of fiscal firepower.
Andrew Garthwaite, Credit Suisse
On the surface things appear to have stabilised in China this week. The nation's second-quarter GDP number came in at 7 per cent, above analyst estimates of 6.8 per cent, while retail sales and industrial production figures well exceeded expectations.
But GDP growth is still at its lowest level since 2009, and the Shanghai Composite Index failed to bounce on the positive news on Wednesday, although it has largely stabilised this week, down 1.4 per cent on Friday.
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Credit Suisse's global research team, led by Andrew Garthwaite, said China's "triple bubble" – a combination of the third biggest credit bubble, the biggest investment bubble and the second-biggest real estate bubble of all time – was the single-biggest risk to the global economy.
China's private sector debt-to-GDP stands at 196 per cent, 40 per cent above its long-term trend. This is more extended than the US at the peak of its credit bubble.
"Historically, a financial crisis has been preceded by credit being more than 10 per cent above trend," Mr Garthwaite said.
The investment share of GDP in China was higher than any other country in history, Mr Garthwaite said.
China was in the middle of a transition from investment to consumption-led growth, which historically leads to a halving of the growth rate.
"China has consumed more cement in the past three years than the US did in the entire 20th century," he said.
Way too much property
China had a "clear cut" housing bubble, Mr Garthwaite said. The size of its real estate as a share of GDP, around 23 per cent, was triple that of the US at its peak.
There was also way too much property, with housing starts at 12 per cent above sales, vacancy rates at 15 to 23 per cent and inventories in its third- and fourth-tier cities holding the equivalent of five years' demand.
House prices to wage ratios also appear excessive in global terms, while the rental yield remains very low at around 2.4 per cent.
"Our concern is that a triple bubble in housing, credit and investment comes with the significant risk of a hard landing," Mr Garthwaite said.
China's house prices have fallen for the first time without political intervention, and housing accounts for more than half of total household assets, indicating a significant negative wealth impact, according to Credit Suisse.
"If house prices fall by 15 per cent or more, then we think that we are likely to get a hard landing and the authorities risk running out of fiscal firepower," Mr Garthwaite said.
"Moreover, with housing contributing to a third of local government revenue, 56 per cent of banks' collateral and around a fifth of GDP, the knock-on impacts could be immense.
Risk of a hard landing
The research comes after Morgan Stanley's head of emerging markets Ruchir Sharma warned earlier this week "the next recession will be made in China".
Mr Sharma told Bloomberg he was steering clear of Chinese stocks, saying if China's economic slowdown continued, it could drag global economic growth below 2 per cent.
Mr Garthwaite said while China's economy had contributed more than one-third of global growth over the past five years, its GDP had slowed but its economy was substantially larger.
"Were China's real GDP growth to slow to 3 per cent in 2015 (and assuming simplistically no spillovers to global GDP), China's contribution to global GDP growth would slow by 0.5 percentage points," Mr Garthwaite said.
"That would imply that global growth in 2016 would be 2.7 per cent, against an IMF forecast of 3.2 per cent.
"This would keep global growth at the same levels as in 2014 and 2015, with an acceleration in the US, Europe and Japan counterbalancing the weakness in China to a large extent."
Lombard Street Research analyst Diana Choyleva said deflationary forces were "likely to persist as China deals with surplus capacity and excessive debt under the burden of an expensive currency".
To rebalance its growth, Ms Choyleva said China needed to feel "a few years of economic and financial pain".
The biggest risk was China's policymakers halting their progress towards opening up the country's economy, on the back of its perceived failure with loosening policy on its share market which led to its collapse, she said.
Credit Suisse did, however, find signs of improvement, including stabilisation in tier-one and tier-two cities, a trade surplus at a five-year high, and room to move with China's policymakers.
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