Hello to all our viewers, welcome to “Qin Peng Observation.”
On October 17th, the Minister of Housing and Urban-Rural Development of the CPC released a set of positive news, but it turned into a trigger for the stock market crash. Where will China’s real estate market head next?
What can we expect for the Chinese economy, the upcoming 6 trillion policies by the Ministry of Finance, and Xi Jinping’s true intentions in trying to save the market, along with the four inevitable reasons for failure?
Firstly, please pay attention to my new YouTube channel and Ganjing account. Thank you.
I would like to share an interesting piece of news I came across today. According to the latest “Global Wealth Report” released by the financial services group Allianz, Taiwan ranks fifth globally in terms of net financial assets per capita, surpassing Japan and ranking second in Asia.
Taiwan is behind only four other countries in the world: the United States, Switzerland, Denmark, and Singapore in terms of per capita net financial assets. This is a source of pride for the Chinese and demonstrates that wealth in China is not limited by race but is attainable even without the Communist Party.
This news reminds me of the proposition put forward by the renowned economist Professor Chen Zhiwu, stating that if a country’s economy grows continuously by an average of over 10% annually for 30 years, the resulting massive wealth could provide a prosperous life for all its citizens. However, the current situation in China paints a different picture, as many might have experienced.
Many individuals have seen an opportunity in the current situation, believing that the CPC is saving the market by distributing funds generously. Consequently, in recent times, over a hundred million individual investors in China rushed into the market, investing over 3 trillion RMB, hoping to make a profit. What will be the outcome? Let’s discuss that today.
Since the end of September, press conferences by the State Council of the CPC have been ongoing. On October 17th, Minister of Housing and Urban-Rural Development Ni Hong announced a combination of measures to stabilize the real estate market, listed as “four cancellations, four reductions, and two increases.” “Four cancellations” entail allowing city governments to implement housing policies tailored to their specific needs, canceling restrictions on real estate purchases, sales, and pricing, as well as standardizations for ordinary and non-ordinary housing. “Four reductions” involve a decrease in the interest rates for housing provident fund loans, lowering down payments for housing loans, interest rates for existing loans, and taxes for trading old properties for new ones, in order to reduce household purchasing costs and alleviate the burden of mortgage loans. The most significant aspect of the plan, “two increases,” includes adding 1 million units for urban village and dilapidated housing renovations and doubling the credit scale of the “white list projects” in the real estate sector to 4 trillion RMB by the end of the year.
Although the news seems positive, the market is not buying into it. Real estate stocks in Hong Kong plummeted by over 8%, and the Shanghai and Shenzhen 300 Index closed down 1.1% on the same day, a decrease of approximately 11% from the high point on October 8th. This rollercoaster ride has left the Chinese stock market in turmoil recently. Hong Kong media outlet “Economic Daily” boldly stated that the eagerly anticipated policy package concerning the real estate market from five departments seems to have struck a blow to the investment market.
Why are investors voting with their feet? There are three main reasons:
Firstly, the measures lack strength. Investors’ appetites had been whetted previously, eagerly seeking significant data to further boost the stock market. Thus, if reality falls short, they are left disappointed. Similar to previous press conferences by the National Development and Reform Commission and Ministry of Finance, which also led to market downturns.
Secondly, while the expansion of the “white list” and the 4 trillion lending target sound promising, in reality, the additional funds provided to the real estate industry are limited. According to Bloomberg data, despite the existence of the white list, domestic lending funds for developers had still decreased by 4% until August this year. Moreover, the objective of setting up the “white list” is to accelerate the construction progress of pre-sold but incomplete housing units. The funds from loans are held in regulated accounts and cannot be used to repay debts or finance new projects. Therefore, expanding the white list quota has limited value in terms of economic growth and does not assist in reducing excess housing inventory or improving people’s expectations for property prices.
Thirdly, the current urban village and dilapidated housing renovation plan is smaller in scale compared to the shantytown renovation plan from 2015-2018. Additionally, due to tight liquidity for developers and financial shortages for local governments, the implementation period for the projects is expected to be more protracted.
Last Saturday, the CPC Ministry of Finance also announced that local governments could utilize funds raised through special bonds to purchase existing housing stock. However, Zheng Leiwen, the head of China Real Estate Research at Galaxy International Securities Hong Kong, noted that the market might be disappointed with the specific figures related to the purchase of special bonds for unsold units. Goldman Sachs economist Wang Lisheng also expressed concern that there is insufficient detail on how to provide funds and implement strategies, focusing on the crucial issue of reducing the excessive inventory of housing units and improving people’s confidence in property prices.
Last Thursday, the People’s Bank of China indicated that they are considering introducing measures for the real estate sector and are contemplating allowing policy banks and commercial banks to provide loans to real estate developers for the acquisition of existing land, with necessary refinancing support from the central bank.
However, the current reality in the Chinese real estate market is that the supply of new homes exceeds demand. Continuing to renovate urban villages and acquire land only adds to the supply. The authorities have not provided answers on how to increase people’s income, strengthen market confidence, and address the issue of people being reluctant to invest in real estate.
Hence, despite Minister Ni Hong’s statement that the market is starting to bottom out and rebound, believing in this might be a mistake. Even though there has been a rise in new housing transactions in October, the expected magnitude is limited, and its sustainability is questionable. In the coming years, Chinese property prices are destined to continue on a downward trend.
Of course, this artificial bull market is not going to die out immediately. Moving forward, the CPC will continue to introduce a series of positive news, leading to peaks and valleys. This presents opportunities for individual investors skilled in short-term operations, aware of market news and good at analysis. However, for the majority of retail investors, I advise against harboring dreams of hitting the 5,000 or 6,000-point milestones, as the CPC will likely only keep you on the edge with meetings and announcements to maintain relative stability in the A-share index, preserving their image.
Last Saturday (October 12th), CPC Minister of Finance Lian Foan announced a series of “fiscal adjustment measures,” claiming to expand debt issuance to resolve local debt risks, supplement state-owned bank capital, stabilize the housing market, and protect people’s livelihoods. However, it is advisable not to expect too much from these measures. Caixin reported that the CPC may issue 6 trillion special national bonds to stimulate the economy. This news is expected to be confirmed by the Standing Committee of the NPC at the end of October.
Even if this plan materializes, the scale is relatively small. Considering the 6 trillion being released over three years, that amounts to only 2 trillion per year, posing challenges related to the direction of funds. Most of the money is predicted to flow towards local government infrastructure projects, resolving local debts, with only a small portion benefiting private enterprises, livelihood upkeep, or enhancing social security – the latter being the fundamental cause of the current poor consumer spending and economic stagnation.
You may wonder why, despite the significant economic stimulus measures introduced by the CPC, particularly the recent monetary and fiscal boost to revive the economy, the effects remain pessimistic. Factoring in China’s high vacancy rates, bad loans, deliberate shedding of USD reserves, among other aspects, one columnist from The Wall Street Journal, Andy Kessler, noted that China is morphing into a 2.0 version of Japan, or perhaps an even more tragic scenario than Japan’s fate.
This indicates that we should not focus solely on immediate prosperity when analyzing situations. No entity or individual can escape the constraints imposed by economic and social laws. Violating these laws will result in consequences.
For those still enamored with making money in the Chinese stock market, I would like to echo the forecasts from banks like Rich countries that the current Chinese recovery is another “false dawn.” The stock market is outpacing reality, and I recommend reducing holdings during rebounds.
That wraps up my sharing for today. For those who enjoy my show, please subscribe to my new YouTube channel and Ganjing Clean World account. You can also suggest topics for analysis in the comments section. Thank you!
YouTube Channel subscription:
https://www.youtube.com/channel/UCjix7du7PHahnSJm8dctzDA
Ganjing Clean World Channel subscription:
https://www.ganjing.com/zh-CN/channel/1eiqjdnq7go7cVXgAJjJp39H61270c