August 11, 2022 - 7:00am
The Chinese property market is in crisis, again, less than a year out from the country’s last. In late 2021, Evergrande, China’s second largest property developer, missed payments on its loans. Yet, the following quarter China logged a healthy annual growth rate of 4.8% in GDP.
It is true that the recent crisis looks more far-reaching. After all, Evergrande was just one company, albeit a rather large one. But the current crisis has the issuance of residential mortgage-backed securities (RMBS) falling by 92%. A crash in RMBS issuance suggests a major contraction in the number of mortgages being issued and has grim echoes of the MBS markets seizing up in Western countries in 2007-08.
Yet, this too is not without recent precedent. In 2014-2015 RMBS issuance was at roughly the same levels that we see today. The impact on the housing market was far larger than Evergrande: new home construction fell by just over 5% and inflation-adjusted house prices plummeted by a historic rate of -7.3% in the second quarter of 2015. Most people working in markets at the time thought that the Chinese housing market — and with it the Chinese economy — was toast.
Such an analysis was perfectly reasonable. After all, China’s property market accounts for anywhere between 18% and 30% of GDP. And it is rare for a market to take the sort of hit that China’s did in 2014-15 and then immediately bounce back. But bounce back it did. In the first quarter 2016, inflation-adjusted prices started to grow again and by the fourth quarter of the same year they were steaming ahead at around +7.1% annual growth. Newly built homes duly responded to the rising prices and by 2017 they were growing by over 12% per year.
The point is that China has beaten its doubters before. Last time we saw the RMBS market collapse in China in 2014-15, the lull did not last long. The reason for this appears to be that China’s real estate sector is largely controlled by the government. Whether through direct government contract issuance or through pressure on Chinese Communist Party (CCP) connected businessmen, the Chinese state appears to be able to dictate the terms of investment.
China also appears to have a debt system immune from widespread default. During the Asian Tigers crisis in the late-1990s, the Chinese government set up so-called Asset Management Companies (AMCs) whose job it is to take bad debt onto their books and, with the help of the money-creating powers of the Chinese central bank, make them disappear. Lately these AMCs have been stuffed full of bad property debt and while there are reports that they are bulging at the seams that are way beyond capacity, there is nothing to stop the government from simply creating more.
The fact of the matter is that the Chinese economy is a hybrid, not a purely market-driven economy. Consumer goods are distributed in the same manner as we see in Western market economies, but the pace of investment and the finance system is controlled by the government. For this reason, indicators that warn of disaster in market economies fail when applied to China’s partially planned economy. This is not to say that the Chinese state will not slip up and create a recession. It might. But it would be a failure of policy on the part of the Chinese, not a purely market-driven collapse of the sort we are used to in the West.
Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics
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SubscribeChange activist to narcissist.
Ha ha. Great article and I learned a new word: “woke-washing.” More than anything, that compound word explains why corporations are so dedicated to wokedom.
Just my 2 cents.
J. Bryant.
Gardener, fisherman, activist.
J – I am a fisherman too, I do a small bit of commercial fishing but the money is so low mostly I stopped that, mostly am just on the water almost every day catching some for the people I care for (most of them do not eat red meat) and friends and acquaintances, and myself and dogs, and mostly to remain sane as I am an outdoors-man, and being on the water keeps me together, and to get the fish as we eat it 4-5 days a week, but mostly to be on the water really – I could not do without being on the water, it is such a huge part of me….
I am just getting the fall garden in – it is dug, the greens planted, turnips, last beans, mulched – later the winter stuff goes in. The grapes are ripening, figs and pears gone, I do jams and marmalade – I need to have nature about, and I have pets and poultry…..
Glad to hear someone else fishes and gardens…..Pity they do not have a chat place here to talk of these things….
Activist too
And it seems the publishing industry is 75% women. I wonder if that has any thing to do with how insanely, destructively, Left it is? Or are the modern males total XXXXXXX too?
Many of these activist books might be more accurately described as progressives “coffee table ballast” rather than “intellectual ballast”.
Or perhaps ‘ zoom virtue displays’ in the bookcase behind the speaker.
Narcissists used to want to seem spiritual rather than shouty and progressive. Passivists rather than activists .
I think a better description of activist books is “racist filth”.
Maybe I’m wrong, but it seems to me that you don’t have sell that many books to be a “best seller” these days.
Presumably these idiots are snapping up each other’s books. I’m not persuaded that the general public buys them.
They will if your HR department makes you buy them and pretend to read them.
We live in a more caring age? Dubious. We live in an age where pretending to care matters more but try asking a volunteer co-ordinator if they are being overwhelmed by demands to come and help
These activists all go the way of China. Vulgar atheism, disdain for family, solidarity, blind pursue of materialistic accumulation only to end up dying in an expensive SUV in a flooded tunnel. It is the capitalism of the concentration camps.
“colossal wally”.
“Resistance to capitalism has become just another way of selling things.” A splendid summary. As time marches on the once inevitabile revolution has become the evolutionary moment of capitalism. Contrary to the expectations of the experts capital has fed on, rather than collapsed under, the weight of its ‘contradictions.’ Perhaps less rather than more ‘activism’ is the answer.
I am here to express my stylistic preference for the serial comma.
Touching lack of cynicism about St Marcus and his PR team, there. Really quite affecting.
Maybe Marcus wants to become a global brand like David Beckham.
Resistance to capitalism has become just another way of practising capitalism: capitalism with added hypocrisy.