Is it time to sell property? Ms Lu, CEO of a wealth management company, asks herself? She owns several properties in different cities in China and hardly has time to “speculate” on properties due to busy workload.
Ms Lu should feel lucky for not selling her apartment in Hunzhou that She intended to sell a few months ago. Being the host city of G-20 2016, Hunzhou, capital city of Zhejiang province located in China’s east coast, has had its profile significantly boosted thanks to a successful summit of world leaders. The price of properties in the city has also appreciated.
Similar story has happened to her properties in Shanghai which have jumped in value by several millions with ease in the past year.
Should Ms Lu be happy about that? It might be, but she faces a series of tough questions: Is it wise to wait for future appreciation? Is it likely a price drop to properties soon? What else can invest except for properties?
As a professional herself in the financial sector, having reviewed stock market, investment funds, foreign exchange market and gold, she still directs her attention to the property market but with a sense of uneasiness.
No one in China denies the fact that property price has gone out of control. Reports after reports pointed out that life-time income of an average young worker will not be sufficient to purchase an apartment in big cities such as Shanghai and Beijing.
The high price of property has been one of the key factors contributing to China’s skyrocketing of production cost as salaries and wages have to be increased to cover high level of mortgage.
On the other hand, abnormal profitability of the property industry has resulted in supply of houses far exceeding the physical need of providing accommodation to the population. Family ownership of property is over 80% in China which could be the highest among major world economies. Every young Chinese will inherit several properties in 30-50 years when their parents pass away.
The Chinese government is facing a dilemma: on one hand, as house affordability has become an acute economical, social and political issue, it becomes obvious that the price of property has to come down. In July and October 2016, the Chinese top leaders called on cooling of the property market commenting that “property is something for living but not for speculation”.
The common methods adopted by the government to hold back housing price are placing a limit on individuals for the purchase of properties in big cities or denying the access to bank loan to those people that have already owned several properties. The property tax is also on the pipeline to be introduced.
But on the other hand, the government in general is fairly timid in introducing such policies for fear that a crash of the property market would trigger financial turmoil and collapse of a large range of manufacturing industries related to the property market.
The delicate situation makes debate on the trend of property market very popular not only in newspapers, academic and business seminars but also TV shows.
It is commonly acknowledged that though purchase of properties can be very profitable in particular cities and at particular times, its long term attractiveness as an investment tool is fading.
The change to the Chinese property market has deep implication to the way in which Chinese middle class preserves their assets.
The definition of middle-income groups in China has always been controversial. Some experts believe that the middle income standard can be defined in the annual income of 60 thousand -12 million yuan. In addition, the family has a certain amount of savings and other monetary assets, household per capita living space is slightly higher than the national average. As a result of this calculation, the current middle-income population is 300 million.
In the past, the booming economy and property market prompted Chinese middle class to buy more properties as a primary way to achieve better returns or simply beat inflation.
Today, given risks associated with the property market is on the rise, to diversify asset composition by investing in properties overseas, gold, and insurance products in Hong Kong have been increasingly playing an important part among Chinese middle class in their wealth management.
Chinese buyers invested a record US$33 billion in commercial and residential properties last year, nearly a 53% increase from 2015, according to JLL Global Capital Flows. The United States was the most popular destination, drawing in US$14.3 billion, followed by Hong Kong, Malaysia, Australia and United Kingdom.
However with the change of China’s economic conditions, property market in China has had a sign of recovery in recent months.
First of all, in order to support employment which is essential to the social stability, the Chinese government has to maintain money supply at a fairly high level to support growth of the economy which is projected to be 6.5 percent next year.
This in combination with high level of debt to Chinese local governments and banks means that the interest rates on Chinese yuan will be kept low.
On the other hand, US dollar and interest to US dollar is on the rise. Given China’s export is slowing down, the rise of the value to the US dollar will put downwards pressure to the Chinese yuan which has depreciated more than 10% since 2014. Devaluation is still the mainstream forecast on the yuan in the future.
The expectation that yuan will depreciate has contributed to outflow of Chinese yuan in large amount as Chinese middle class escalate their investment overseas to defend their wealth.
In face of the big fell of China’s foreign reserves which has reduced by one fourth to US$3 trillion in the last one and a half year, the Chinese government has placed restrictions on purchase of offshore assets by Chinese companies and individuals and made it harder for Chinese citizens to shift their money overseas.
The combined effects of restrictions on international transfer of funds, low interest rates and expectation of devaluation on the Chinese yuan has turned into a kind of stimulus factor for the Chinese real estate market.
In January and February, the sale of commercial properties in China jumped by 26%. The increase is particular strong in China’s second and third tier cities. The price of new house increased by 37.3% annually in Nanjing, and 13.2% in Qingdao according to figures released by the National Bureau of Statistics of China. In the first two months of 2017, the investment in China’s real estate market rose by 8.9%.
The rise of property price has triggered a new round of restrictions in some Chinese cities. However some economists doubt if the government will whole-heartedly implement this control as slowdown of the property market will deeply hurt government revenue and economic growth as a whole.
This situation highlights the level of deformity to the Chinese economy. The government intervention that distorts the price structure to some key economic factors ranging from labour, land and to taxation has led to formation of an economy that is deeply troubled with huge overcapacity and obsolete manufacturing industries. The potential of a major devaluation to the Chinese yuan could significantly chop down wealth of the Chinese people.
The way-out for China is to implement further reforms that define a proper relationship between the government and market and restructure its economy by moving to high value added and high-tech industries.
China was seen as a safe haven for investment and China’s contribution to global economic growth exceeded 50%. Even today, China’s contribution to global economic growth is still at 25%. If China successfully completes a structural reform and successfully switches its growth engine, it will continue to create wealth and grow middle class in a substantial scale. Last October, Jack Ma, founder of Alibaba said in public that China’s middle class could grow to 500 million in 5-10 years. This means the demand for asset management for Chinese middle class both in domestic and international market will be enormous.