In analyzing China, we often disaggregate numbers for real estate/property and investment. We do this because this reveals that whereas income in China—measured as a percentage of GDP—is keeping pace, consumption appears to be falling when measured by that metric. Another reason to differentiate this analysis is that when most Chinese purchase a residence, they either pay cash or take out a mortgage for less than 50% of the property value. Contrast this with the U.S., where private individuals typically take out mortgages for over 80% of property value.
Unlike in the U.S., where—in the robust pre-crisis real estate market—individuals could secure stated-income, no-doc loans, in China it is not at all easy to obtain a mortgage. Because of this, rising real estate investment usually engenders markedly decreased consumption. So the market movement of house prices has a different economic impact in each country.
When house prices fall in China, the economic impact is felt more through a “negative wealth effect,” whereas in the U.S., the primary impact is usually a credit crunch in which consumers struggle to pay down debt. And Chinese consumers seem able to withstand negative wealth effects well. For example, in recent years, the value of China’s A-share market (A-shares are Shanghai- and Shenzhen-listed equities denominated in renminbi) fell by about 70% from peak to trough as China absorbed the impact of the global financial crisis, thereby “wiping out” some US$2.5 trillion of nominal wealth—in a country with a US$8 trillion GDP.
But this negative wealth effect appears to have had only a minimal effect on consumption. China’s GDP growth has slowed from 10% – 11% to 7% – 8% primarily as a consequence of weak demand in China’s primary export markets in the U.S. and Europe. Today, loans in the banking system are collateralized by land prices, but to get a significant fall in land prices in such a fast-growing economy would seem to require a huge shock to productivity.
This article is part of the report “China—Separating Fact from Fiction”, published by Matthews Asia. You may access the complete report through this link.