China’s property bubble is collapsing, with average house prices now down 10% from their peak. As agents Knight Frank note,
“The developers have two to five years of stock to clear. So until that has been cleared, prices aren’t going up any time soon”
We are also seeing more bankruptcies amongst property developers. These began a year ago with Cement Shen’s ‘Peach Blossom Palace’ $563m bankruptcy. Now the sums involved are rising, with the Shenzhen-based Kaisa Group debts reportedly exceeding $10bn, and major restructuring under discussion.
As always, chemical/plastic markets have provided vital early warning of the problems ahead, as the chart above confirms. It shows China’s net imports/exports of PVC, a key product for the property industry due to its use in windows, cables, pipes and other applications (trade data from Global Trade Information Services):
- The property bubble caused net imports to soar to 1.5 million tonnes in 2009/10, as stimulus money increased
- Imports then began to be replaced by domestic production, which rose from 9MT in 2009 to 13MT by 2011
- By 2013, production had risen 71% to reach 15MT – but new government policies meant demand was slowing
- Last year production grew to 16MT – but only because exports nearly trebled from 400kt in 2013 to 1.1MT
Thus China has now become a net exporter of PVC. This is a major change from the previous position, where it had been the world’s largest importer.
Equally important is that all Regions have seen either a slowdown in their exports to China, or a complete reversal. N America has seen its net exports fall back to zero, despite its shale gas advantage, whilst SE Asia has seen its net exports of 240kt in 2009/10 reverse to net imports of 220kt last year.
As I suggested last summer, the impact of China’s move to adopt its ‘New Normal policies is likely to prove both long-lasting and far-reaching. They are already creating “Losers”, both Directly and Indirectly:
LOSERS – DIRECT
1. Anyone dependent on Chinese demand for growth
Industries currently based on exports to China such as autos, metals, energy, chemicals, luxury goods
Countries based on exports to China including Latin American exporters, Asian exporters
2. Anything for which Chinese lending has been critical
Official and shadow banking borrowers in China’s State Owned Enterprises and private sector
Real estate, and commodities financed by the ‘collateral trade’ in China
LOSERS – INDIRECT
1. Service sectors supported indirectly by China’s growth and lending
Areas supported by the post-2008 stimulus impact on global trade flows eg shipping, finance
Investors in financial assets eg almost 50% of S&P 500 earnings come from outside the US
2. Markets where Chinese buyers have become major players overnight since 2008
Real estate markets around the world eg London, New York, Singapore
M&A undertaken to boost China’s overseas asset base eg energy, trophy assets
Since the summer, of course, the extent of the problem has got worse, just as I feared. Many developers had borrowed in US$ to reduce their interest bill versus borrowing in local currency. Now their capital repayment cost is soaring, as the US$ breaks out of its 30-year downtrend.
Companies and investors who continue to ignore the advance warning provided by PVC markets likely have an unpleasant shock ahead of them.