China's burst housing bubble is unsettling investors

Should you invest in China? The effects of the real estate bubble.

China’s burst housing bubble is destabilizing the local economy, and that is increasingly unsettling investors. This article looks at the impact the real estate crisis is having and why stamina is likely to pay off against the backdrop of the National Congress of the Communist Party of China.

The real estate bubble in China

For decades, owning property was considered the epitome of the Chinese dream. Anyone who could afford it bought their own apartment. Members of the middle class even bought a second one. Because of that, China's mortgage debt level has grown to one of the highest in the world in recent years. More than 70% of private savings in the country are now tied up in real estate.

"Homes are for living in, not for speculating."

Chinese President Xi Jinping

That created a speculative bubble, which grew and grew. Just before the pandemic broke out, China's President Xi Jinping tried to stop it. "Homes are for living in, not for speculating," was the nationwide warning call. Unfortunately, that campaign came too late. The market climbed to unprecedented highs. That is, until COVID-19 and the demise of Evergrande, China's largest and highly indebted real estate conglomerate, which put an end to the recklessness. What remains are ghost towns as far as the eye can see.

The consequences of the housing crisis on China's economy

Since then, a wave of bankruptcies, credit defaults, growing discontent, and hidden unemployment has visibly swept the country. Chinese consumer confidence and demand for bank loans have plummeted, and new real estate projects have been canceled. Many people who have already made down payments on their homes have spent months waiting for the keys to be handed over. The cash flow management of general contractors resembles a house of cards: Without constant new sales, it comes crashing down. China is stuck in a classic liquidity trap.

Housing bubble in China leads to deteriorating consumer sentiment

1. Collapse of consumer confidence as a result of the housing bubble

Source: Chinese National Bureau of Statistics, Macrobond, Longview Economics
Last data point: 01.07.2022

Housing bubble in China leads to collapse in construction investment

2. Collapse of construction investment as a result of the housing bubble

Source: Chinese National Bureau of Statistics, Longview Economics, Macrobond
Last data point: 01.08.2022

Housing bubble in China leads to collapse in demand for credit

3. Plummeting demand for credit as a result of the housing bubble

Source: People’s Bank of China, Macrobond, Longview Economics
Last data point: Q2 2022

What is the global impact of China's burst housing bubble?

China's current economic situation brings back memories of the US real estate crisis. The latter ended in a global financial crisis in 2008, and US mortgage-backed securities tore deep holes in the portfolios of international investors.

In China's case, there is no threat of fallout for international investments. That is because Chinese mortgages are almost exclusively held by domestic banks. And because those institutions are owned by the state, the government will be likely to cover the cost of the losses. As a result, China will avoid the catastrophic bank runs like the ones that occurred in Europe and the US.

China's labor cost advantage has been largely eroded

The economic problems in China also raise the question of the future of globalization as a whole. That is because China's economy is now on an equal footing with that of the US, as shown by a global wage comparison. In 1990, average hourly wages in the US were still 50 times higher than in China. That wage difference has now shrunk significantly to only three times higher.

Factoring in the increased freight costs, it becomes clear that most of the economic advantage of China's export model has been eroded.

China's economy is losing its strategic labor cost advantage

China's strategic labor cost advantage has mostly disappeared

Source: Credit Suisse, Bloomberg
Last data point: 07.09.2022

Should you invest in China? Useful information for investors.

The current economic situation in China is making investors increasingly jittery. Yet, there are three insights worth keeping in mind when making investment decisions:

1. The crisis was preceded by a decades-long economic boom

It would be wrong to write off China on account of its real estate crisis. After two decades of economic growth, China is going through a crisis similar to that experienced by nearly every European nation since World War II. It comes as no surprise that these domestic challenges have something to do with China's tough regulation of the technology sector and its US-listed companies.

2. The economic crisis in China will be temporary

Crises come and go. What remains are China's competitive economy, the sheer size of the country, plus its importance in emerging Asia and throughout the world. China's economy is an important part of the global economy; its stock exchanges are an integral component of global diversification.

3. China's planned energy transition offers investment opportunities

China offers investors corporate bonds in hard currency with above-average yields to maturity outside the real estate market. Credit Suisse is also expecting major fiscal stimulus from China's central government after the National Congress. According to industry insiders, the package is likely to total more than 5% of economic output. That would be more than the COVID-19 stimulus. A large part of this is likely to flow into China's energy transition, which has been given strategic priority. Investors can profit from themes such as this.

Do you have any questions about this topic?

Schedule a consultation
We would be happy to help. Please give us a call at 0844 844 001.